Political Activism and Market Power

74 Pages Posted: 6 Aug 2020 Last revised: 18 Feb 2021

See all articles by Elia Ferracuti

Elia Ferracuti

Duke University - Fuqua School of Business

Roni Michaely

The University of Hong Kong; ECGI

Laura Wellman

Pennsylvania State University; Pennsylvania State University - Department of Accounting; Penn State University

Date Written: February 14, 2021

Abstract

We find that politically active firms’ ability to navigate policy uncertainty enables firms to amass
market power. We overcome the nonrandom nature of political activism using instruments for the
marginal benefit and marginal cost of political activism, and document increases in profit margins
and returns on assets following periods of high policy uncertainty, especially among large politically
active firms. Politically active firms exercise their information advantage by timing large
investments during periods of policy uncertainty. We corroborate our findings using a second
experiment, analyzing the strategic behavior of politically active firms around a broad set of
legislative actions. Overall, our evidence suggests political activism is an important mechanism that
allows firms to grow and protect their market power.

Keywords: Market Power, Political Activism, Policy Uncertainty, Competition, Profitability, Profit Margins, Market Share, Capital Investment

JEL Classification: D72, G31, G38, P16

Suggested Citation

Ferracuti, Elia and Michaely, Roni and Wellman, Laura, Political Activism and Market Power (February 14, 2021). Swiss Finance Institute Research Paper No. 20-60, Available at SSRN: https://ssrn.com/abstract=3585372 or http://dx.doi.org/10.2139/ssrn.3585372

Elia Ferracuti

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1974 (Phone)

Roni Michaely (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Laura Wellman

Pennsylvania State University ( email )

378 Business Building
University Park, PA 16802
United States
6026225683 (Phone)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Penn State University ( email )

University Park, PA 16802-3306
United States

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