The Impact of Political Connections on Managerial Short-Term Resource Adjustment Decisions

Abstract

This study examines the effect of political connections (i.e., lobbying) on firms’ short-term resource adjustment decisions (i.e., the asymmetric reaction of cost to changes in sales activity). Controlling for a wide range of known determinants of managerial cost behavior as well as firm-level political risk, our results suggest that lobbying firms exhibit significantly less cost stickiness than non-lobbying firms. Lobbying thus reduces managers' preferences to engage in “wait-and-see games”, as it likely results in preferential access to information on government budgeting and legislative processes. The “lobbying effect” is more pronounced for firms without any alternative equivalent information channel, such as personal relations with lawmakers, permanent exchange with regulators, or government contracts. These findings hold for several robustness checks, for instance, controlling for potential self-selection, employing alternative measures of political connections as well as (political) uncertainty, and alternative sample specifications.

Keywords: resource adjustment, cost behavior, political connections, lobbying, political risk

JEL Classification: D8, D72, M40, M41