Friends in Low Places: The Impact of Political Scandals on Connected Firms’ Stock Prices

65 Pages Posted: 5 May 2021 Last revised: 3 Jan 2023

See all articles by Susanne Preuss

Susanne Preuss

University of Amsterdam

J. Wielhouwer

Vrije Universiteit Amsterdam

Date Written: April 30, 2021

Abstract

We use the exogenous nature of political scandals to test whether political connections in the form of campaign contributions expose firms to reputational risk. We hand-collect a sample of 218 scandals of members of the U.S. Congress that occurred between 2000 and 2019 and estimate the abnormal returns around the day a scandal first appeared in the news. We find that connected firms and to a lesser extent other politically active firms experience value losses around corruption scandals involving firms or lobbyists. These losses increase in managers’ propensity to engage in unethical behavior. Moreover, we find that following such corruption scandals shareholders of connected firms are more likely to submit proposals on the disclosure of political contributions, and connected firms reduce political spending. Overall, our results suggest that losses around scandals are driven by reputation spillover and investors updating their beliefs about the risks of political contributions.

Keywords: Corruption, political contributions, political scandals, reputation spillover, shareholder activism

JEL Classification: G14, G30, L14

Suggested Citation

Preuss, Susanne and Wielhouwer, Jacco L., Friends in Low Places: The Impact of Political Scandals on Connected Firms’ Stock Prices (April 30, 2021). Available at SSRN: https://ssrn.com/abstract=3838693 or http://dx.doi.org/10.2139/ssrn.3838693

Susanne Preuss (Contact Author)

University of Amsterdam ( email )

Amsterdam Business School
Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

Jacco L. Wielhouwer

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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