Corporate political strategies

Accounting and Finance 51 (2011) 252–277

Corporate political strategies Ike Mathura, Manohar Singhb a Department of Finance, Southern Illinois University, Carbondale, IL 62901-4626, USA The Pennsylvania State University, Great Valley School of Graduate and Professional Studies, Malvern, PA 19355, USA

b

Abstract The paper offers a comprehensive and integrative review of the current literature on corporate political strategies sharing common boundaries with finance, accounting and corporate governance. While there appears to be a heightened interest among researchers in studying the value relevance of corporate political strategies [Chen et al. (2010), Goldman et al. (2009), Cooper et al. (2010), Richter et al. (2008), Hochberg et al. (2007), de Figueiredo and Edwards (2007), Faccio and Parsley (2009), and Myers (2009) among others], interestingly, finance and corporate governance scholars have yet to embrace the research on political strategies as part of their mainstream research. Taking a micro perspective at the firm level, we review the major scholarly works in the economics, finance and management disciplines with respect to the firm attributes shaping the corporate decision to engage politically, modes of corporate political participation, and the value impact of corporate political activity. The overarching theme of the review article is to integrate diverse – political economy and management – paradigms of corporate political participation and rationalize the value relevance within the corporate finance and corporate governance perspective. The paper also presents focused preliminary evidence on the determinants and value impact of corporate lobbying strategies. For the sample of 5452 firm-year observations, the results indicate that while for large firms corporate lobbying may not be agency driven and may create value, for small firms, despite low shareholder rights associating with higher lobbying engagements, lobbying still relates positively to value added. Key words: Corporate political strategies; Shareholder rights; Agency conflict; Lobbying JEL classification: G30 doi: 10.1111/j.1467-629X.2010.00386.x

Received 17 March 2009; accepted 1 October 2010 by Robert Faff (Editor).  2010 The Authors Accounting and Finance  2010 AFAANZ

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1. Introduction Although the extant literature in political science and economics suggests that businesses value political connections, and political engagements are a significant part of the overall corporate nonmarket strategies, most of the research on political engagements of businesses seems to fall short on both the theoretical and the empirical dimensions. Current research seems to combine a number of diverse paradigms from a variety of disciplines without furnishing a comprehensive integrated theoretical framework to analyse corporate political strategies. Empirically, there is a lack of robust evidence on the determinants of corporate decisions to engage or otherwise in political activities, their modes of political participation and the performance impact of their political strategies. Getz (2002: 306) highlights that ‘…there is not even an agreed upon theory of … political strategy … literature provides inconsistent explanations of why firms become politically or publically engaged and how firms go about their political and public activities.’ Further, with respect to the value relevance of corporate political strategies, Getz (1997: 64) concludes, ‘[While] we have a very good understanding of which firms engage in corporate political action (CPA) and their rationales for doing so … we are not certain about the effectiveness of tactics … Our least complete understandings revolve around the ways that CPA changes over time and the setting in which CPA occurs.’ Recently, while there appears to be a heightened interest among researchers in studying the value relevance of corporate political strategies [Chen et al. (2010), Goldman et al. (2009), Cooper et al. (2010), Richter et al. (2008), Hochberg et al. (2007), de Figueiredo and Edwards (2007), Faccio and Parsley (2009), and Myers (2009) among others], clear and conclusive evidence is missing (Brasher and Lowery, 2006). More interestingly, finance and corporate governance scholars have yet to embrace the research on political strategies as part of the mainstream research. Given the gaps in our understanding of the corporate political strategies and the multitude of perspectives spread over a diversity of academic disciplines, this paper aims to provide a comprehensive and integrative review of the current literature sharing common boundaries with finance, accounting and corporate governance. 1.1. Our focus The paper takes a micro-firm level perspective and reviews the major scholarly works in the economics, finance and management disciplines with respect to the firm attributes shaping the corporate decision to engage politically, modes of corporate political participation and the value impact of corporate political activity. The overarching theme of the review article is to integrate diverse – political  2010 The Authors Accounting and Finance  2010 AFAANZ

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economy and management – paradigms of corporate political participation and rationalize the value relevance within the corporate finance and corporate governance perspective. While there have been extensive literature reviews on corporate political activities in management (Shaffer (1995) and Hillman et al. (2004)), to the best of our knowledge, this is the first attempt to synthesize topical research from the finance and governance perspectives. We specifically focus on scholarly work published since 2000 in the fields of economics, management and finance. We structure our review around four fundamental research questions addressed in the literature on corporate political strategies: • • • •

What motivates firms to associate with political institutions and participate in political processes? What are the modes of participation in political processes? What are the consequences of political participation or absence thereof? Is the value relevance of political strategies conditioned by corporate governance?

The theoretical underpinnings and relevant empirical evidence from across the disciplines are synthesized as answers to the above-mentioned four questions. Throughout the paper, the central theme of corporate finance and corporate governance is maintained. After taking stock of the current knowledge on the issue of corporate political strategies, the paper presents focused preliminary evidence on the determinants and value impact of corporate lobbying strategies. Finally, we discuss major gaps in our understanding of the multifaceted issues and identify future areas of research. 2. Rationale and determinants of corporate political activities On the issue of motivation behind corporate political contributions, two schools of thought are developing and at best some inconclusive and mixed evidence has started to emerge. On the one hand, it is argued that political contributions are aimed at generating value for shareholders by influencing policy decisions in favour of the contributing firm. This line of argument suggests that contributions can favourably influence the election outcome and/or policy stance taken by the supported candidates. In this paradigm, political contributions are perceived as valuable investments that would result in improved firm performance and greater wealth for the shareholders. On the other hand, researchers argue that political contributions may be a manifestation of managerial ‘consumption’ preferences. Within this framework, the argument suggests that corporate contributions reflect managerial perquisite consumption. The logical inference from this agency-theoretic argument is that

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political contributions are wasteful expenditures and are more likely made by the firms with lax governance standards. 2.1. Firm as a rational value maximizing entity The former view of corporate political activities treats a firm as a value maximizing rational business entity. Hart (2010: 3) suggests that for a rational value maximizing corporate entity, ‘‘… if the expected benefit of a political expenditure is greater than the expected benefits of alternative investments that the firm might make, the cost is incurred. The firm thus operates on what might be called a ‘political possibility frontier’ (analogous to the production possibility frontier in economics) in which its political resources are efficiently invested across policy areas, jurisdictions, and tactics.’’ This framework helps us identify a wide variety of firm characteristics that may explain a firm’s decision to engage politically and the degree of such engagement in terms of capability (to incur political investment cost) and incentives (expected benefits). Researchers have identified the following common firm attributes that explain a firm’s decision to lobby or make political action committee (PAC) contributions. 2.1.1. Firm size It is suggested that larger firms engage politically to a greater degree as they have greater capacity and incentive to do so. Schuler and Rehbein (1997) suggest that firm size represents a firm’s ability to engage in political activities. A positive relation between size and political engagement has also been rationalized in terms of free riding by smaller firms. Hart (2010) suggests that a rational value maximizing smaller firm would choose not to utilize resources for political activities, especially those that are aimed at providing collective benefits for the industry as a whole. Smaller firms would, in general, free ride on the efforts of larger players. Cooper et al. (2010) report that firms making contributions through PACs are significantly larger than noncontributing firms. Their sample time-series average of the yearly median capitalization of contributors is $1.6B versus $195M for the noncontributing firms. Similarly, Hansen and Mitchell (2000) and Brasher and Lowery (2006) show that firm size is an important determinant of lobbying. Other studies (see, for example, Hansen et al., 2005; Drope and Hansen, 2006) report that several of their sample firms do not make campaign contributions or engage in lobbying. Evidence (Cooper et al., 2010) also suggests that larger firms support more candidates. Cooper et al. (2010) report that in a typical year, only 7.2 per cent of publically listed firms are contributing firms. However, in terms of market value, those firms represent about 48 per cent of total market capitalization. The numbers reveal that firms participating in the political process are very large firms. Cooper et al. (2010) also report that firms with relatively greater number of business and geographical segments are more likely to make PAC contributions.  2010 The Authors Accounting and Finance  2010 AFAANZ

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2.1.2. Risk Stock volatility is a measure of risk and information asymmetries in finance. Return volatility also captures the lifecycle stage of a firm (Pastor and Veronesi, 2002). Greater volatility reflects firms that are at an early stage of their lifecycle, are smaller, and have greater future uncertainty. Myers (2007) reports that firms with lower return volatility are politically more active. In fact, next to size, volatility is the most reliable and significant predictor of political activity. Myers (2007) also provides evidence that while the interest coverage ratio does not explain PAC formation, firms with a lower interest coverage ratio have higher level of political activity in terms of PAC contributions made. 2.1.3. Leverage Within the corporate finance perspective, depending upon the degree of debt financing, leverage can impact corporate value either positively or negatively. Interest tax deductibility makes debt financing a cheaper source of funding and hence adds value. However, too much debt financing can increase the probability of financial distress and hence, increase the cost of debt and equity financing, leading to negative value consequences. From a corporate governance angle, leverage represents a bonding mechanism that reduces the possibility of managerial agency conflict. Thus, if political activities are agency driven, high leverage may relate to lower lobbying or PAC contributions because of the discipline imposed by debt. However, high leverage might also relate positively to political investments as greater political engagement could actually be a solution to the problems and risks manifesting in higher leverage. Empirical results reported by Cooper et al. (2010) and Faccio et al. (2006) suggest that politically engaged firms have higher leverage. Lack of financial strength is another possible reason for firms to engage in political activities. 2.1.4. Firm performance Firms experiencing poor performance might not be able to afford resources to pursue political activities. Thus, one may expect a negative relation between performance and proclivity and intensity of political investments. However, it is plausible to argue that political engagements can be a solution to alleviate problems causing poor performance. Here, poor performance is expected to relate positively to expenses on lobbying and/or PAC contributions. It can be argued that firms that are underperforming view political engagement as a possible solution to their underperformance. Supporting this possibility, Cooper et al.’s (2010) results indicate that on average, contributing firms have lower returns over the previous three-year period, higher book-to-market, lower cash flow, and higher leverage compared to noncontributors. Cooper et al. (2010: 12) rationalize their findings as suggesting that ‘… If there are in fact extra costs (above  2010 The Authors Accounting and Finance  2010 AFAANZ

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and beyond the nominal costs of hard money contributions) to participating effectively in the contribution process, then it appears that the high-contributing firms, with their much larger firm size, may be more able to incur these expenses than the low-contributing firms. In addition, because of their recent poor stock price and earnings performance, PAC firms, relative to their noncontributing size-matched peers, may have a greater incentive to establish political connections that can help increase firm performance.’ Myers (2007) reports that firms with lower previous profitability are more likely to establish PACs in hopes of improving their performance. Finally, Chen et al. (2010) show that firms increase their lobbying outlays following poor performance and realize better future performance over and above the mean reversion related performance rebound. 2.1.5. Growth opportunities It is plausible to argue that firms with greater future growth opportunities are more likely to engage politically. Growth opportunities not only serve as a proxy for potential to grow but also capture the uncertainty associated with growth. In both dimensions, higher growth opportunities will influence a firm’s political strategies. First, to realize growth potential, firms might need political allies. Additionally, to hedge themselves against possible uncertainties and potential competition in growth sectors, firms can choose to actively solicit political connections. Myers (2007) reports that firms with high capital expenditure are more likely to be politically engaged. This might be reflective of political engagement because of a firm’s need to capture future growth opportunities. Researchers (Singh et al. 2009) also utilize the ratio of research and development (R&D) expenditures to sales to capture uncertainties associated with the technologyintensive nature of a firm’s business. They report a positive link between R&D intensity and the degree of a firm’s political engagement. 2.1.6. Industry effects Industry economic and regulatory dynamics are expected to influence a firm’s lobbying behaviour. For instance, Schuler et al. (2002) report that political activity at the industry level positively associates with that at the firm level, and firms in more concentrated industries show greater likelihood of being politically engaged. Similarly, Andres (1985) and Masters and Keim (1985) suggest that firm participation rates in the political process are conditioned by industry characteristics. With respect to the impact of industry level political activities on corporate performance, Shon’s (2006) evidence on industry level donations indicates that industry groups that donated more to Republicans experienced positive abnormal returns after the 2000 presidential elections. Similarly, analysing stock returns around the 2000 presidential election, Knight (2006) shows that current stock prices capture future policy and legislative effects on corporate value.  2010 The Authors Accounting and Finance  2010 AFAANZ

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His evidence suggests that industries expected to fare better under the republican president will tend to donate more to campaigns. 2.2. Firm as a ‘Nexus of Contracts’ In the agency theoretic framework, corporate political activities can be reflective of managerial agency conflict. In the rational value maximizing perspective of a firm, management faithfully pursues shareholder wealth maximization. There is no conflict of interest between management (agents) and shareholders (principals). However, given the lack of transparency, weak corporate democracy, and divergence between management and shareholder objectives, managerial political engagements may be the cause of concern for investors. Two main reasons for this concern come to mind. First, in the real world, characterized as it is by performance-linked compensation plans and information asymmetries, management might be motivated to undertake political activities that boost short run performance – and hence their payoff – at the cost of long-term value creation for shareholders. The second reason for the concern is that in the pursuit of personal interests – political connections and positions, promoting, for example, political ideologies and preference – management can use political investments in a wasteful manner, yielding neither short-term nor long-term value gains. Skeptics of corporate political-contributions-as-value-maximizing-investments argue that if investment in political engagements is an efficient and productive usage of resources, why do we not see more firms engaged in lobbying and at a larger scale than observed? Ansolabehere et al. (2003) observe that given the level of impact that public policy and government contracts can have on businesses, there seems to be too little investment in developing political connections. To rationalize the phenomenon of too few dollars chasing politicians, Ansolabehere et al. (2003: 105) offer a different perspective, ‘… that campaign contributions should be viewed primarily as a type of consumption good, rather than as a market for buying political benefits.’ The logical question that arises in this perspective is Whose consumption preferences do the political expenses represent, shareholders’ or their agents’? Per the Federal Election Campaign Act of 1974 (FECA), organizations may not contribute money to political campaigns directly sourcing it from the corporate treasury. Lobbying, however, is a corporate expenditure and comes out of the corporate treasury controlled by management. According to Jensen (1986), managers with access to free cash flow might engage in wasteful spending. Extending the political-contributions-as-consumption perspective to lobbying, agency theorists argue that management may engage in lobbying as wasteful consumption financed by shareholders’ money. Thus, skeptics view lobbying expenses as satisfying managerial personal preferences and perquisite consumption motives. There are several possible scenarios for value consequences. The first possibility is that lobbying is value destroying as it misallocates resources away from potentially productive usage. However, given that lobbying outlays are relatively small, the direct negative value  2010 The Authors Accounting and Finance  2010 AFAANZ

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consequences of lobbying – even if it is wasteful – could be economically insignificant. The second possibility is that lobbying might be value enhancing as well as promoting the personal interests of management. That is, lobbying may well be consistent with management-shareholders interest alignment. The indirect value consequence could be of greater significance. Agency-driven managers might lobby for promoting legislative and administrative policies that create a power balance that is favourable to management relative to shareholders. There exists significant evidence suggesting a negative relation between management entrenchment and corporate value. Gompers et al. (2003) provide evidence that the greater is the managerial power relative to shareholders, the poorer is corporate value performance. Bebchuk et al. (2004) and Bebchuk and Cohen (2005) provide complementary evidence. In addition, management might also be instrumental in promoting legislation that dilutes disclosure requirements and hence market monitoring, thereby creating opportunities and incentives for their self-serving behaviour at the cost of shareholders. A case in point is the corporate resistance to passage of the Sarbanes Oxley Act in 2000. Corporate executives might view political connections as instruments for boosting their career progression. Additionally, nurturing political connections to get into socio-political spotlights may be a major attraction for several corporate executives. That pursuit and the resulting distraction might result in loss of corporate shareholders value. Malmendier and Tate (2007) suggest that ‘superstar’ CEOs lose focus in running their firms and their firms underperform in terms of accounting and market performance. Thus, political engagements motivated by personal interests might be manifestation of agency problems. Hart (2010: 177) suggest ‘‘… the goals of those involved may include fame (as in the case of ‘Davos man’), election to public office (‘Potomac fever’), enactment of policies of personal interest, and personal wealth, in addition to improving the collective fortunes embodied by the firm.’’ Myers (2007) provides limited evidence linking managerial distraction to corporate political activity as well as of managerial hubris partly explaining firm level PAC activity. The evidence that political activities might be agency driven is not conclusive however. Farrell et al. (2001) analyse determinants of the political contributions made by top management to their firm’s PACs. They report that PAC contributions are positively related to executive shareholdings and option holdings. They interpret their findings as evidence that political engagements align managerial and shareholding interests. Similarly, Gordon et al. (2007) provide evidence of a robust relation between corporate contributions and pay for performance sensitivity. Their interpretation of their findings is that political engagements reflect a better alignment of corporate and management interests. Cooper et al. (2010) interpret their findings of a positive relation between firm performance and political contributions as consistent with the value maximizing rational view of the firm rather than the agency theoretic explanation of corporate political activities. They argue that treating money in politics as too little (Ansolabehere et al., 2003) and based on that, concluding that political contributions are consumption  2010 The Authors Accounting and Finance  2010 AFAANZ

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preferences, is misleading. Cooper et al. (2010: 23) suggest that ‘… to the extent that the costs of successfully participating in the political contribution process are higher than the nominal costs of PAC contributions, and to the extent that firms receive real economic benefits from their participation, our results are consistent with the idea that firms participate in the political system not from the standpoint of consuming a patriotic consumption good, as discussed in Ansolabehere et al. (2003), but rather from the standpoint of creating positive net present value investments.’ 3. Modes of political participation Traditionally, two main known channels through which firms establish political connections are identified as a) contributions to political offices through PACs and b) corporate lobbying. Recently, there is an emerging body of literature, especially in the corporate governance area that emphasizes the importance of political connectedness of businesses in terms of formal and informal networks including board memberships by politicians and executives joining politics. In addition, firms can also participate in the political process through membership in trade associations and industry organizations. Our focus is on political activities of a firm as an individual entity. We focus on the literature dealing with the corporate decision to form a PAC, decision to lobby and decision to establish an organizational link with politicians. The main distinction between political participation through PAC contributions and through lobbying lies in terms of decision point and the source of funds. PAC contributions are individual employee decisions that are voluntary in nature and management does not have direct control over the individual contributions made to PAC funds. Lobbying expenses, in contrast, are accounted for and appropriately reported expenses that are incurred at managerial discretion. Per the Federal Election Campaign Act of 1974 (FECA), organizations may not contribute money to political campaigns directly sourcing it from the corporate treasury. Lobbying, however, is a corporate expenditure and comes out of the corporate treasury controlled by management. Although extant literature in political science and economics suggests that businesses value political connections and lobbying engagements are a significant part of corporate nonmarket strategies, most of the research on political engagements of businesses focuses on corporate campaign contributions through PACs. Brasher and Lowery (2006) suggest that despite extensive research on corporate political activity, clear and consistent conclusions remain elusive because researchers have focused on PAC contributions rather than on lobbying activities and have just studied a narrow set of large firms. Brasher and Lowery (2006: 1) opine, ‘… unfortunately, the literature does not provide very clear and consistent answers about why some organizations lobby and other do not ... [and] ... the literature on lobbying impact has generated an equally confusing and inconsistent set of empirical results.’  2010 The Authors Accounting and Finance  2010 AFAANZ

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Existing research points out that lobbying is a more important – volume and effectiveness – channel to influence political decisions impacting businesses. For instance, while Milyo et al. (2000) provide evidence that firms spend significantly more on lobbying activities than on PAC or soft money contributions, Brasher and Lowery (2006) report that the number of active PACs is relatively quite small compared to the number of lobbying entities. Finally, Chen et al. (2010: 10) report that ‘… If we compare the average firm’s political spending across the three categories (by aggregating lobbying expenses per year into amounts per election cycle to match the reported PAC and soft money) in the 1998 election cycle, for instance, we see that lobbying is around 22 times greater than PAC contributions, and around 20 times greater than soft-money contributions.’ Similarly, Bombardini and Trebbi (2008) report that for 2006, interest group lobbying expenditures at $2.59 billion far outweighed the $345 million in campaign contributions. More recent evidence (see for example, Myers, 2005) suggests that lobbying and PAC contributions are complementary modes in augmenting a firm’s access to political power corridors. Humphries (1991) also provides evidence of a strong correlation between lobbying intensity and PAC contributions. Echoing similar sentiment, Hojnacki and Kimball (2001) suggest that while just having a PAC may not increase the level of political access available to a firm, having a network that forms PACs provides support that can result in increased access through other political activities including lobbying. There are an increasing number of researchers focusing on networking and the resource boundary-expanding role of corporate management teams in complimenting PAC and lobbying efforts of corporate entities. Goldman et al. (2009) investigate the extent to which political connectedness exists in US firms and to what consequence. Defining political connectedness in terms of former politicians serving on corporate boards, they investigate two types of scenarios. In the first set of tests, they assess the value impact of the 2000 presidential elections. They report that in the postelection period, firms with boards classified as Republican significantly outperformed the portfolio of firms classified as having a Democrat board. In addition, the evidence indicates that the Republican portfolio exhibited a positive and significant cumulative abnormal return (CAR) following the election. At the same time, following the election, the Democrat portfolio exhibited a negative CAR. In the second set of tests, they report that firms that nominate politically connected individuals to their boards experience significantly positive abnormal stock returns following the nomination announcement. Goldman et al. (2009: 2333) interpret their findings as, ‘‘… First, a company’s value goes up in anticipation of future benefits following the nomination of politically connected individuals. Second, when the director’s political party gains control of the presidency, the value generated by her increases while the value generated by a director connected to the opposing party decreases.’’ Agrawal and Knoeber (2001) provide further evidence that firms adjust their board composition in their  2010 The Authors Accounting and Finance  2010 AFAANZ

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effort to build political connections. They point to a greater tendency to nominate a board member with a political background in firms that are involved in government business or otherwise function in intensely competitive markets. In non-US settings, Fisman (2001) provides evidence that political connections are valuable in developing countries. Studying Indonesian firms, Fisman (2001) provides evidence indicating that firms connected with President Suharto experienced value loss at the time of the negative news about Suharto’s health. In a broader international setting, Faccio (2006) reports positive value relevance of political connections defined in terms of controlling shareholders or top managers being in political positions. Her evidence suggests that politically connected firms experience lower tax burdens and have easy access to capital. Goldman et al. (2009) report that board connectedness is a better predictor of political engagements than PAC contributions. Finally, Myers (2007) suggests that PAC contributions are less informative in studying the political strategies of corporate entities. His argument (Myers, 2007: 10) revolves around PAC contributions being relatively small compared to other modes of political participation, ‘… corporate PAC donations are small relative to politicians campaign budgets, and corporate PACs do not donate the marginal political dollar in close or expensive elections. There is little empirical evidence that campaign donations affect the behaviour of political roll call votes. And finally, corporate PAC activity is a small portion of overall corporate political activity. These considerations call into question the appropriateness of using PAC data to make inferences about the relationships that exist between politicians and firms.’ 4. Value relevance of corporate political engagements There are several approaches researchers have taken to the assess value consequences of corporate political engagements. From the accounting and finance perspective, the most direct way to measure the value impact of political activities is to relate them to financial markets and accounting performance. Several studies relate the decision to establish PACs and the level of PAC contributions to stock returns and operating performance. Recently, there is an emerging focus on lobbying where researchers [see for example, de Figueiredo and Tiller (2001), Brasher and Lowery (2006), and Chen et al. (2010)] relate the decision to lobby and the degree of lobbying (proxied by lobbying expenses and number of lobbyists hired) to various measures of corporate performance. Another trend emerging in the recent finance literature is to assess the performance impact of political engagements in terms of political connections of corporate boards and management teams. Both traditional multiple regression and event study approaches have been employed to study market value consequences of engaging politically through the hiring of politically connected board or management team members. Some studies have also analysed events like the disruption of political connection because of the sudden death of a corporate political ally. In other fields,  2010 The Authors Accounting and Finance  2010 AFAANZ

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researchers have investigated the linkage between political engagements and the realization of beneficial policy outcomes or avoidance of unfavourable policy decisions. 4.1. Financial performance Stigler’s (1971) work serves as the theoretical foundation for relating a firm’s performance to its political engagements. Governments, in their role as regulator, policy makers, as well as business clients, have influence on corporate performance. In this perspective, corporate political activities are motivated by securing favourable policy outcomes, tax and subsidy benefits, and government contracts. 4.2. Stock returns Studying the stock return performance impact of approximately 819,000 PAC contributions made by 1930 firms between 1979 and 2004, Cooper et al. (2010) report that a portfolio of firms weighted by the number of supported candidates has a statistically significant higher monthly return of 21 basis points (or about 2.4 per cent per year). To rule out the possibility of spurious correlation driving their results and to establish that it is the greater degree of political engagement that contributes to better firm performance, the authors report that consistent with causation, contributions are correlated with an improvement in future performance. The results also suggest that the performance impact in terms of the number of supported candidates is economically meaningful in that a one-standard deviation increase in the number of supported candidates leads to about a 2.6 per cent annual higher abnormal return. Myers (2005) provides additional evidence that ‘… in some industries the riskadjusted performance differential between firms with PACs and those without can be as large as 6 per cent per year. In the case of firms with PACs, the quintile of firms that spend the least outperforms the quintile of firms that spends the most by upwards of 10 per cent per year.’ Interestingly, the findings suggest that within firms that have a PAC established, those that contribute relatively greater amounts, underperform those that contribute less. Evidence provided by Myers (2005: 3) also indicates that ‘…the political process creates nontrivial systematic risk that affects asset pricing, that this risk is understood and considered by investors and is priced…’. Chen et al. (2010) analyse the impact of political activities in terms of lobbying on market performance using a portfolio approach. Their results also indicate that portfolios of firms with the highest lobbying intensities significantly outperform their benchmarks portfolios. Chen et al. (2010: 25) report ‘… firms with the highest lobbying intensities outperform their benchmarks of nonlobbying firms … also show that increases in lobbying tend to follow poor performance … [F]irms with the highest lobbying intensity outperform other firms …’.  2010 The Authors Accounting and Finance  2010 AFAANZ

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4.3. Operating performance Politically connected firms realize gains in terms of better operating performance as well. Evidence provided by Faccio and Parsley (2009) suggests that politically connected firms suffer a decline in sales growth at the time of the disruption in the connection. Chen et al. (2010) also report that on average, lobbying is positively related to accounting measures of financial performance. Their results are robust to variations in empirical model specifications and performance measures and hold after controlling for potential sample selection bias. As noted earlier, Cooper et al. (2010) provide similar evidence on the positive impact of PAC contributions on firm operating performance measured in terms of return on equity. Alexander et al. (2009) study return on corporate lobbying investments in the context of the American Jobs Creation Act of 2004. Their estimates (Alexander et al., 2009: 1) indicate that ‘… firms lobbying for this provision have a return in excess of $220 for every $1 spent on lobbying, or 22,000 per cent.’ The evidence suggesting a favourable value consequence of political engagements is not only limited to the United States. Studying over twenty thousand firms in forty-seven countries, Faccio (2006) concludes that firms, on average, experience about a two per cent increase in shareholder wealth at the time of the announcement of their executive or large shareholder joining politics. Oberholzer-Gee and Luez (2006) also provide evidence from Indonesia on value relevance of political connections. Their findings suggest that political connections are value relevant as they facilitate domestic capital raising on relatively favourable terms for politically engaged firms compared to nonconnected firms. Their evidence indicates that those connected firms that experience a reduction in patronage with political regime changes experience performance deterioration and initiate seeking funding abroad. These findings are in line with the evidence reported by Jayachandran (2006) wherein an unanticipated change in political party affiliation by a politician may lead to a market value loss for firms making PAC contributions to the party left by the politician. Political connections can also be valuable in terms of direct government support at the time of distress. For instance, Faccio et al. (2006) provide evidence that politically connected firms are more likely to be bailed out by the government. Similarly, Claessens et al. (2008) find evidence supporting a positive link between campaign contributions and stock returns for Brazilian firms. Further, the positive impact of political activities is also observed in the nonprofit arena as well. For instance, de Figueiredo and Silverman (2006) study lobbying by universities seeking educational funding. They report that universities lobbying with Senate Appropriations Committees can generate returns that are 10 to 15 times of their lobbying dollar investments. They also report a higher return for universities that have representation on house appropriation committees.  2010 The Authors Accounting and Finance  2010 AFAANZ

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Myers (2009) provides evidence that the corporate capital structure is influenced by political connections of firms. Myers argues that while politicians may impose costs on firms to realize political benefits, they also want to make sure that those costs do not lead to firms going bankrupt. Myers argues that firms facing hostile politicians optimally increase their leverage to discourage politicians from imposing costs on them. Myers (2009: 1) suggests that ‘‘Since the probability of financial distress increases with leverage, firms optimally increase their debt to discourage the cost impositions from ‘hostile’ politicians. Similarly, in the presence of ‘friendly’ politicians, firms optimally lower their debt levels’’. Using US data, Myers reports that large firms reduce their leverage to the order of 3 per cent when friendly politicians chair their relevant industry senate committees. The resulting reduction in the cost of bankruptcy and risks associated with high leverage are expected to impact corporate value positively. Richter et al. (2008) provide evidence on lobbying consequent tax saving benefits. Studying a large set of US firms Ritcher et al. report, ‘…on average we expect firms with 1 per cent higher lobbying expenditures to realize a 0.5 to 1.6 per cent point lower effective tax rate.’ 4.4. Impact in terms of policy influence Research on the impact of lobbying and PAC contributions on public policy outcomes suggests that specific policy outcomes are influenced by political engagements (see, for example, Ramirez and Eigen-Zucchi, 2001 for the Clayton Act of 1914, Ramirez and de Long, 2001 for the Glass-Steagal Act of 1993, and Rehbein and Lenway, 1994 for trade policy issues). Specific to lobbying, Lord (2000) reports that the congressional staff perceived professional lobbying as the most effective way to influence congressional legislative policy provisions. With respect to the influence of public policy on firm performance, while Banker et al. (1997) study airline carriers, Bowman et al. (2000) look at pharmaceutical firms. Given that both of the studies report that expected policy changes impact market value, it is plausible to argue that lobbying and PAC activities aimed at swaying policy outcomes influence firm value. Lo’s (2003) analysis of the 1992 revision of executive compensation disclosure rules suggests that firms who lobbied against the proposed regulation experienced positive abnormal stock returns of about six per cent. Within the political economy framework, trade policy models (Magee et al. (1989) and Grossman and Helpman (1994)) posit that corporate entities make campaign contributors with an aim to maximize value added from those contributions. Liebman and Reynolds (2009) analyse the impact of campaign contributions made by the corporate beneficiaries and Congressional sponsors of Byrd Amendment. They report that campaign contributions from beneficiaries increased the likelihood of lawmakers sponsoring the law. In addition, contributions from the law’s beneficiaries and the expected rents from the passage of the law were positively related. Evans and Sherlund (2006) examine  2010 The Authors Accounting and Finance  2010 AFAANZ

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whether and in what ways lobbying impacts antidumping case outcomes. Building on empirical framework of Grossman and Helpman (1994), they provide evidence that antidumping duty rates tend to be higher – thereby affording greater protection – for politically active petitioners compared to nonpetitioners. Studying the Stock Option Accounting Reform Act of 2004 (the Act), Farber et al. (2007) report that House members who supported the Act were more likely to have received larger PAC contributions. In addition, the evidence suggests that the greater the anticipated benefit of the act, the greater the contributions made by the firms to the House and Committee members. More recently, in the context of the Sarbanes-Oxley Act, Hochberg et al. (2007) report that firms that lobbied against the passage of ‘Enhanced Disclosure,’ ‘Corporate Responsibility’ and ‘Auditor Independence’ provisions experienced greater cumulative returns relative to the nonlobbying firms within the four-and-a-half month window preceding the passage of the Act. Focusing on industry-specific issues, de Figueiredo and Edwards (2007) report that there is a significant effect of private money on regulatory policy outcomes in the telecommunication industry. Still, lack of systematic and conclusive evidence of an effect of contributions on policy outcomes (Chamon and Kaplan, 2007) has resulted in some researchers (Milyo et al., 2000 and Ansolabehere et al., 2003) concluding that political investments are insignificant compared to the potential returns (incorrectly) attributed to them as they are perceived to be inconsequential in generating value. Ansolabehere et al. (2003) study of interest group contributions suggests that contributions are generally ineffective in favourably influencing voting outcomes. There is some emerging evidence that suggests that political engagements might not be value relevant or that they can actually have a negative impact on corporate performance and value. For instance, Goldman et al. (2009) report that while political connections in terms of politicians’ representation on corporate boards do add value, political contributions do not seem to influence industry-adjusted performance. Similarly, findings reported by Aggarwal et al. (2007) suggest that PAC contributions are agency driven and negatively influence future stock performance. They interpret their finding as providing only limited support for the hypothesis that political donations represent investment to create value. In addition, management might promote their interests by committing corporate and accounting fraud and taking shelter against detection by engaging in lobbying. Yu and Yu (2010) report an interesting positive link between lobbying and corporate fraud. Utilizing data on corporate lobbying outlays between 1998 and 2004, they report that ‘… firms’ lobbying activities make a significant difference in fraud detection: compared to nonlobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud … are 38 per cent less likely to be detected by regulators. In addition, fraudulent firms on average spend 77 per cent more on lobbying than  2010 The Authors Accounting and Finance  2010 AFAANZ

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nonfraudulent firms and spend 29 per cent more on lobbying during their fraudulent periods than during nonfraudulent periods.’ Finally, Fan et al. (2007) report that Chinese firms that are politically connected have relatively inferior corporate performance. Skeptics also point out that there can be a conflict of interest between lobbyists as agents and corporate management who hire them as principals. For instance, utilizing ethnographic methods to study lobbyists and government affairs managers, Kersh (2002) concludes that the agents, at times, pursued their own agenda contradictory to the goals of corporate entities employing them, thereby, destroying rather than creating value. 5. Corporate governance and value impact of firm political activities Finally, we provide empirical evidence on corporate political activities – in terms of lobbying – as influenced by shareholders’ rights and relate them interactively to corporate value creation in an integrative unified framework. 5.1. Data and sample selection Our annual corporate lobbying data come from the database compiled by the Center for Responsive Politics (CRP, 2008). The sample lobbying data cover the 5-year period from 1998 to 2003. The choice of the time frame is dictated by data availability as the first year CRP lobbying data is available is 1998. For analysing shareholder rights as they impact decision to lobby and the degree of lobbying intensity, and interactively influence firm performance, we study governance and performance variables back 2 years to 1996. With an aim to study a relatively homogenous set of US firms, we focus on the Stern Stewart annual list of best performing firms. We start with the 1000 firms placed on Stern Stewart’s 2003 best performing firms list and trace these firms back for 7 years to 1996. We restrict our sample to nonfinancial firms. To measure the quality of corporate governance, we focus on the degree of shareholder rights. As a proxy for shareholder rights, we utilize the Governance Index developed by Gompers et al. (2003) (GIM) and the Entrenchment Index developed by Bebchuk et al. (2004). To construct these indices, we obtain information on governance provisions from the Investor Responsibility Research Center (IRRC) database for 1995, 1998, and 2000, and 2002. Gompers, et al. report that at the firm level the Governance Index is relatively stable. To create a continuous series of the governance index spanning the sample period of 1996 to 2003, we follow the commonly accepted practice of extrapolating the last available year’s observations on governance provisions until the new data are available. We utilize COMPUSTAT database to gather accounting data on control variables. Combining the Stern Stewart, IRRC, CRP, and COMPUSTAT databases, our final sample consists of 5452 firm-year observations.  2010 The Authors Accounting and Finance  2010 AFAANZ

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5.2. Measurement and description of variables 5.2.1. Shareholder rights In their construct, GIM utilize the IRRC data on a variety of governance provisions that restrict takeovers. The IRRC reports twenty-two charter takeover defence provisions, bylaw provisions, and other firm-level rules as well as six state takeover laws. GIM focus on twenty-four unique provisions to arrive at their governance index. The Governance Index calculation involves summing individual provisions that restrict shareholder rights by protecting managers against takeover threats. The interpretation of the governance index is straightforward: the higher the index, the greater is the managerial power and weaker are the shareholder rights. Thus, the index is reflective of the balance of power between management and shareholders. We also utilize the Bebchuk et al. (2004) Entrenchment Index as an alternative proxy for management entrenchment. Reflective of shareholder rights, the Bebchuk et al. (2004) index has an interpretation similar to the GIM index. 5.2.2. Lobbying intensity We consider aggregate parent company level annual lobbying expenses reported by firms as a measure of their lobbying intensity. This measure considers lobbying expenditures undertaken in-house as well as through contracted lobbyist firms. To eliminate any possibility of reverse causality, we utilize dependent lobbying variables with a lag. 5.2.3. Corporate Performance We utilize two distinct, but related, measures of corporate value creation. The first measure is Stern Stewart’s economic value added (EVA). We also utilize Stern Stewart’s market value added (MVA) metric to assess the long-term value impact of lobbying engagements. We utilize the following control variables. Firm size: To control for the multidimensional influence of firm size, we utilize the natural log of the book value of total assets as a proxy for firm size. Leverage: We utilize the ratio of total debt to total assets as a measure of leverage. Firm performance: We use return on assets as a proxy for corporate performance. Growth opportunities: In our models, we use the market to book ratio as a proxy for growth opportunities facing a firm. Capital expenditure: We also control for revenue adjusted capital expenditures to clearly delineate the impact of resource constraints on lobbying intensity.  2010 The Authors Accounting and Finance  2010 AFAANZ

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Industry effects: To clearly delineate the influence of a firm’s governance characteristics on its lobbying strategy and its value consequences, we use one-digit SIC code industry dummies to control for industry effects. 5.2.4. Sample statistics Table 1 provides the sample descriptive statistics. Our final sample consists of 5452 firm-year observations. The sample firms represent 1000 best performing firms in terms of economic value added per the Stern Stewart rankings. The average MVA is $7781.3m with a large standard deviation. The median MVA for the sample period is $1669.9m. Corresponding EVA numbers are at $20.3m and $25.6m. As expected, the spread between the return on invested capital and cost of capital is positive. The mean governance index and entrenchment index levels at 9.37 and 2.12 are comparable to those reported in the literature on shareholder rights. The sample firms show a large variance in firm size measured in terms of market value, revenue, assets or income. The sample firms, on average, spend $0.54m on lobbying and hire 1.93 lobbyists. Excluding nonlobbying firms, we find that for the subsample of lobbying firms only, the mean (median) annual lobbying expense is $1.15m ($0.4m) while the number of lobbyists engaged is 4.06 (2.00). 5.2.5. Comparison of lobbying and nonlobbying firm characteristics The results displayed in Table 2 suggest that lobbying firms are significantly more value generating – in terms of both the market value added and economic Table 1 Sample descriptive statistics

Market value added ($ million) Cost of capital (in per cent) Economic value added ($ million) Return on invested capital Governance index (Gompers et al., 2003) Entrenchment index (Bebchuk et al., 2004) Total assets ($ million) Sales ($ million) Net income ($ million) Debt to total assets ratio R&D to sales ratio Return on equity (in per cent) Return on assets (in per cent) Market value ($ million) Lobbying expense ($ million) Number of Lobbyists Number of observations = 5452

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Mean

Median

SD

7781.33 8.15 20.33 12.39 9.37 2.12 17764.32 7344.68 411.38 0.27 0.05 14.97 4.20 17630.51 0.54 1.93

1669.94 7.85 24.59 8.57 9.00 2.00 3825.07 2735.83 154.37 0.26 0.00 13.82 4.35 4299.92 0.00 0.00

27521.88 1.94 939.89 117.74 2.76 1.33 62777.83 15903.69 1642.91 0.20 0.53 185.76 14.14 61221.75 1.47 4.67

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Table 2 Mean comparison of lobbying and nonlobbying firm characteristics

Variable

NonLobbying Firms

Lobbying Firms

Difference

p-value

Market value added ($ million) Cost of capital (in per cent) Economic value added ($ million) Return on invested capital Governance index Entrenchment index Total assets ($ million) Sales ($ million) Net income ($ million) Debt to total assets ratio R&D to sales ratio Return on equity Return on assets Market value ($ million) Lobbying expense ($ million) Number of Lobbyists

3606.72 8.35 12.40 14.78 9.13 2.09 7933.23 3864.12 179.62 0.24 0.05 0.11 0.04 8636.38 0.00 0.05

12374.54 7.93 29.12 9.74 9.64 2.16 28306.98 11077.15 659.92 0.29 0.05 0.19 0.04 27149.15 1.15 4.06

8767.82* )0.42* 16.72 )5.04** 0.51* 0.07*** 20373.76* 7213.03* 480.30* 0.05* 0.01 0.09** 0.00 18512.78* 1.15* 4.00*

0.00 0.00 0.53 0.09 0.00 0.05 0.00 0.00 0.00 0.00 0.54 0.09 0.90 0.00 0.00 0.00

*Statistically significant at the 1% level. **Statistically significant at the 10% level. ***Statistically significant at the 5% level.

value added – than nonlobbying firms. Tracing the source of value added, we find that in terms of return on invested capital and return on assets, lobbying firms actually perform relatively poorly. However, they outperform nonlobbying firms in terms of return on equity. This is reflective of higher leverage in lobbying firms compared to nonlobbying firms. A significantly lower cost of capital seems to be the major driver of considerably higher MVA in lobbying firms relative to nonlobbying firms. Firm size and financial structure are often identified as critical determinants of firm performance. Our data indicate that lobbying firms are larger and have greater financial leverage. With respect to managerial entrenchment, it is clear that lobbying firms have greater managerial entrenchment. Lobbying firms are placed higher on the Gompers et al. (2003) Governance Index and the Bebchuk et al. (2004) Entrenchment Index. An interesting conclusion from the statistics in Table 2 is that while lobbying firms have weaker shareholder rights, they outperform nonlobbying firms in terms of value added. 5.2.6. Lobbying intensity and management entrenchment To quantify the extent to which managerial entrenchment influences degree of lobbying, we estimate two multiple regression models each for small and large  2010 The Authors Accounting and Finance  2010 AFAANZ

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firms relating lobbying expense to two distinct measures of managerial entrenchment (the Gompers et al., 2003 Governance Index and the Bebchuk et al., 2004 Entrenchment Index). Given the previous evidence that firm size is a significant influence on lobbying expense, it may be informative to analyse the possibility that size moderates the relation between lobbying and entrenchment. To analyse this possibility, we estimate our models relating lobbying to managerial entrenchment separately for two subsamples based on firm size. Firms with market value above the sample median are categorized as large firms and those with market value below the sample median are categorized as small firms. We control for several firm-specific characteristics that may have a bearing on lobbying intensity. The results of our multiple regression models are presented in Table 3. In Model 1, the test variable is the Gompers et al. (2003) Governance Index as the proxy for managerial entrenchment. The significant negative coefficient of the governance index variable implies that for large firms a greater degree of management entrenchment associates with lower expenses on lobbying. This finding does not seem to support the agency explanation of corporate lobbying. When we utilize the Bebchuk et al. (2004) entrenchment measure in Model 2, we find that for large firms, this alternate measure of managerial entrenchment is also related significantly negatively to lobbying intensity.

Table 3 Multivariate regression relating shareholder rights and lobbying intensity in small and large firms

Variable Intercept Governance index Entrenchment index Debt to total assets ratio Capital expenditure to sales ratio R&D to sales ratio Return on assets Log total assets Industry controls N Model p-value Adjusted R-square

Dependent variable-lobbying expenditure

Dependent variable-lobbying expenditure

Model-1 Large firms (t-statistics)

Model-1 Small firms (t-statistics)

Model-2 Large firms (t-statistics)

Model-2 Small firms (t-statistics)

)3.104* ()6.640) )0.044* ()3.680)

)0.667* ()6.862) 0.006* (3.225)

)3.180* ()7.106)

)0.630* ()6.529)

)0.714* ()3.596)

0.009 (0.297)

)0.120* ()5.117) )0.665* ()3.359)

0.009** (2.237) 0.006 (0.222)

0.021 (0.089)

)0.068* ()3.736)

0.047 (0.199)

)0.069* ()3.759)

1.377* (6.284) 3.061* (6.169) 0.972* (32.619) Yes 2541 0.000 0.382

0.108* (4.070) 0.065*** (1.820) 0.086* (11.880) Yes 2513 0.000 0.070

1.350* (6.176) 2.911* (5.865) 0.956* (31.816) Yes 2541 0.000 0.385

0.108* (4.067) 0.066*** (1.860) 0.086* (11.936) Yes 2513 0.000 0.0680

*Statistically significant at the 1% level. **Statistically significant at the 5% level. ***Statistically significant at the 10% level.

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If, as generally accepted, relatively powerful managements are more likely to engage in agency behaviour and if lobbying is considered wasteful, we should expect a positive relation between entrenchment and lobbying intensity. However, our tests reveal that the degree of managerial entrenchment and lobbying intensity is negatively related. In terms of the shareholder rights-lobbying link, the interpretation is that firms with greater shareholder rights (less managerial entrenchment) engage in lobbying to a greater degree. One can argue that at firms with greater shareholder rights, management is under greater pressure to focus on value creation and use lobbying as one possible way to create value. To conclude in favour of this argument, we need to relate lobbying to value creation. We explore this aspect shortly. With respect to small firms, however, it appears that greater management power (lower shareholder power) relates positively to lobbying intensity. This finding holds true for both measures of managerial entrenchment. If lobbying is wasteful, this positive relation between managerial power and lobbying expense would reflect agency conflict. In the next set of tests, we relate value creation to lobbying intensity to see if in small firms lobbying indeed is reflective of agency conflict. With respect to control variables, we find that in the large firm subsample firms with a greater degree of financial leverage lobby less. One possible interpretation is that higher leverage could act as a limiting factor on lobbying outlays. We also find that for the small firm subsample firms with greater capital requirements lobby relatively less. The negative relation between capital expense and lobbying intensity might also be reflective of resources constraints typically faced by small firms. As expected, firms with heavy investments in R&D lobby more. Also, larger and better performing firms seem to have greater lobbying intensity. The main finding reported in Table 3 is that firm size moderates the relation between managerial entrenchment and lobbying. While for large firms, a greater degree of managerial entrenchment relates negatively to lobbying intensity, the relation is positive for small firms. The results are robust to variations in the entrenchment proxies. The findings run counter to those expected within the agency framework where large firms, with their greater availability of free cashflows, are expected to have greater agency problems. Further research is needed to explore possible alternative explanations. For instance, it is plausible to argue that small firms have greater information asymmetries and management can afford to engage in lobbying activities without getting adverse market reactions or political press coverage. Another possibility is that smaller firms are at a growth stage of their lifecycle and lobby to hedge risks and effectively tap into newer opportunities. 5.2.7. Managerial entrenchment, lobbying, and value creation In Table 4 we present the result of our analysis relating Managerial entrenchment and lobbying to value creation. To ensure robustness, in the multiple  2010 The Authors Accounting and Finance  2010 AFAANZ

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Table 4 Multivariate regression relating shareholder rights and lobbying intensity to value added in small and large firms

Panel A Small firms Intercept Log total assets Debt to total assets ratio Governance index Entrenchment index Lobbying expenditure Industry controls N Model p-value Adjusted R-square Panel B Large firms Intercept Log total assets Debt to total assets ratio Governance index Entrenchment index Lobbying expenditure Industry controls N Model p-value Adjusted R-square

Dependent variable: market value added

Dependent variable: economic value added

Model 1 (t-statistics)

Model 2 (t-statistics)

Model 1 (t-statistics)

4.18* (4.674) 0.42* (5.966) )1.79* ()5.25)

4.15* (4.883) 0.45* (6.388) )1.68* ()4.942)

0.95 (0.977) 0.86 (0.915) 0.46* (6.264) 0.48* (6.620) )0.76** ()2.010) )0.63*** ()1.682)

)0.01 ()0.377)

)0.01 ()0.514) )0.10*** ()1.983) 0.71* (3.455) 0.78* (3.407) Yes Yes 496 360 0.000 0.000 0.204 0.232

0.66* (2.912) Yes 495 0.000 0.205

Model 2 (t-statistics)

)0.13** ()2.382) 0.61* (3.007) Yes 360 0.000 0.226

2.09** (2.437) 1.76** (2.251) 0.79* (11.121) 0.75* (10.889) )2.50* ()7.146) )2.32* ()6.658)

)1.75** ()2.032) )2.02** ()2.499) 0.68* (10.245) 0.64* (9.893) )1.26* ()3.749) )1.10* ()3.306)

)0.10* ()4.293)

)0.06* ()2.791)

0.10* (2.836) Yes 627 0.000 0.374

)0.24* ()5.594) 0.12* (3.530) Yes 625 0.000 0.389

0.17* (4.476) Yes 483 0.000 0.411

)0.16* ()4.110) 0.21* (5.420) Yes 482 0.000 0.429

*Statistically significant at the 1% level. **Statistically significant at the 5% level. *** Statistically significant at the 10% level.

regression analysis, we utilize MVA as well as EVA as performance measures. To avoid the possibility of confounding effects of lobbying and entrenchment on MVA and EVA, we orthogonalize lobbying with respect to entrenchment. For each subsample, we estimate four models with various combinations of two proxies each for value creation (MVA and EVA) and managerial entrenchment (the Gompers et al., 2003 Governance Index and the Bebchuk et al., 2004 index). We control for firm size (log of total assets) and financial leverage (ratio of debt total assets) as well as industry effects at the one-digit SIC level. The results of this analysis are presented in Table 4. The estimated coefficients for lobbying variables are significantly positive for all eight models estimated. Thus, lobbying positively influences value creation whether measured in MVA or EVA terms. In conjunction with the previously reported relation between  2010 The Authors Accounting and Finance  2010 AFAANZ

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managerial entrenchment and lobbying intensity, we can interpret our results as rejecting the agency explanation of lobbying. Our results also indicate that consistent with the existing empirical evidence provided by several studies (Gompers et al., 2003; Bebchuk et al., 2004, among others), there is a significant negative relation between value creation and managerial entrenchment. Entrenchment proxies carry a negative significant coefficient for six of the eight models estimated. The evidence implies that firms with weaker shareholder rights perform poorly in terms of MVA and EVA. With respect to control variables, we find that in general, larger firms and firms with lower financial leverage perform better in term of MVA and EVA. Overall, the findings suggest that for large firms corporate lobbying might not be agency driven and may in fact create value. For small firms, despite low shareholder rights associating with higher lobbying engagements, lobbying still contributes to corporate value. References Aggarwal, R. K., F. Meschke, and T. Y. Wang, 2007, Corporate political contributions: investment or agency? Available from URL: http://ssrn. com/abstract=972670. Agrawal, A., and C. Knoeber, 2001, Do some outside directors play a political role? Journal of Law and Economics 44, 179–98. Alexander, R. M., S. W. Mazza, and S. Scholz, 2009, Measuring rates of return for lobbying expenditures: an empirical analysis under the American Jobs Creation Act, Available from URL: http://ssrn.com/abstract=1375082. Andres, G. J., 1985, Business involvement in campaign finance: factors influencing the decision to form a corporate PAC, Political Science & Politics 18, 156–81. Ansolabehere, S. J., J. de Figueiredo, and J. Snyder, Jr, 2003, Why is there so little money in U.S. politics? Journal of Economic Perspectives, 17, 105–30. Banker, R., S. Das, and C. Ou, 1997, Shareholder wealth effects of legislative events: the case of airline deregulation, Public Choice 91, 301–31. Bebchuk, L. A., and A. Cohen, 2005, The costs of entrenched board, Journal of Financial Economics 78, 409–33. Bebchuk, L. A., A. Cohen, and A. Ferrell, 2004, What matters in corporate governance, Harvard University Olin Discussion Paper No. 491. Bombardini, M., and F. Trebbi, 2008, Competition and political organization: Together or alone in lobbying for trade policy? Working paper. Bowman, R., F. Navissi, and R. Burgess, 2000, Regulatory threats and political vulnerability, Journal of Financial Research 23, 411–20. Brasher, H., and D. Lowery, 2006, The corporate context of lobbying activity. Business & Politics 8, 1–24. Center for Responsive Politics, 2008, Available from URL: http://www.opensecrets.org/ news/2008/04/another-record-year-for-lobbyi.html. Chamon, M., and E. Kaplan, 2007, The iceberg theory of campaign contributions: political threats and interest group behavior, Working paper, IMF. Chen, H., D. C. Parsley, and Y. Yang, 2010, Corporate lobbying and financial performance. Available from URL: http://ssrn.com/abstract= 1014264. Claessens, S., E. Feijend, and L. Laevena, 2008, Political connections and preferential access to finance: the role of campaign contributions, Journal of Financial Economics 88, 554–80.  2010 The Authors Accounting and Finance  2010 AFAANZ

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