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. Controlling for a wide range of known determinants of managerial cost behaviour, our results suggest that lobbying firms exhibit significantly less cost stickiness than non-lobbying firms. Lobbying reduces managers' "wait-and-see games" as they obtain preferential access to information on political and legislative processes. With early knowledge of impending (political and regulatory) threats and long-lasting downturns, managers can adjust unutilised capacity more swiftly. This effect is more pronounced for firms without alternative information channels like permanent exchange with regulators. Our findings hold for several robustness checks, for instance, controlling for potential self- and sample-selection bias or employing alternative measures of political connections as well as (political) uncertainty.

Keywords: cost behaviour, cost stickiness, lobbying, political connections, resource adjustment

JEL Classification: D8, D72, M40, M41