Do Pivotal Politicians Benefit Constituent Companies?

Abstract

We study how pivotal politicians use their political leverage to benefit constituent firms. U.S. senators from swing states are more pivotal to passing legislation than senators from partisan states when the Senate is controlled by a narrower margin of seats, and we exploit the resulting shift in bargaining power to identify the effects of political leverage on firms. We find that firms located in swing states increase investment, have higher market valuations, and raise more equity when the Senate is relatively balanced. We further find evidence that these positive effects stem from favorable tax and trade policies. Lastly, we conduct an event study around the 2021 Senate runoff elections in Georgia, and find that swing-state firms experienced higher stock returns relative to partisan-state firms following an unexpected even split in the Senate.

Keywords: pivotal politicians, corporate investment, firm value, redistribution

JEL Classification: D72, G31, G32, G38, H25