The Electoral Effects of Corporate Connections

• In Event: Economics, Public Opinion, and Elections

Abstract

Although an extensive body of research has documented how firms and politicians often interact to their mutual pecuniary benefit through mechanisms such as preferential contracts, regulatory forbearance, and the “revolving door,” much less is known about whether firm connections benefit politicians electorally (Faccio 2006; Diwan et al. 2020; Fisman 2001). I argue that private firms with politician owners, managers, or directors may make business decisions to support their connected politicians around election times. Specifically, I focus on two types of firm behaviors that may electorally benefit their connected politician. First, I investigate whether private firms connected to incumbents follow political business cycles, expanding (or retaining employees) before elections, which could increase positive economic sentiment in the incumbent’s district. Second, I examine whether access to a connected firm provides an advantage in campaign finance in the form of corporate PAC and employee donations and/or contributions from other in-district firms in the same industry.

I explore these dynamics in the context of candidates running for the US House of Representatives in the period 2004-2018. I acquire data on House members' outside positions and create a new dataset of challenger candidates' positions by digitizing their financial disclosure documents. I find that connected House candidates receive more total contributions and expenditures from committees and individual donors than unconnected candidates, even when controlling for a variety of possible confounders. Second, I find that in-district companies connected to incumbents hire significantly more during election years relative to unconnected firms, suggesting that connected firms follow political business cycles. This dynamic does not hold for challenger-connected firms, which I argue is because challengers have no incentive to boost local economic sentiment. Finally, I test whether these mechanisms successfully translate into higher electoral returns for connected politicians and examine how the effect of connectedness differs across party and incumbency status. I find that politicians with ownership, management, or director positions earn significantly higher returns in House elections, with the effect largest for challenger candidates and Republicans.

I aim to make four primary contributions with this paper. First, I create a novel dataset of challenger candidates’ outside positions, opening opportunities for future research on how firm connections affect candidate behavior. Second, my results contribute to a nascent literature documenting that political business cycles do not apply just to state-owned enterprises, but also to private firms with political connections, which has so far only investigated cases outside of the US (Bertrand et al. 2018; Markgraf and Rosas 2019). Third, my findings extend the literature on how workplaces are important sites of electoral mobilization (Hertel-Fernandez 2018). Finally, my argument and results help reconcile conflicting findings in the political connections literature. On the one hand, the conventional wisdom holds that firms are typically the first movers in political connections and engage in quid pro quos with politicians as a form of non-market strategy to achieve policy and financial objectives. In this model, politicians provide insider information, preferential treatment, or access to elite networks, all of which enable the firm to perform better financially; in exchange, the firm provides cushy employment after the politician leaves office or another bribe or kickback. On the other hand, several studies have found that political connections may not always result in superior firm performance (Dal Bo and Rossi 2007; Akcigit et al. 2023; Bertrand et al. 2018). My results underscore that politicians may also aim to utilize firm resources to benefit themselves electorally, rather than merely financially. A politician’s electoral vulnerability and degree of management/ownership power in a firm are two variables which may influence whether they can demand costly electoral favors from the firm, which may hurt rather than help its bottom line (even if traditional financial quid pro quos occur separately). Vulnerable incumbents may have higher incentive, and owners/managers have higher ability, to manipulate firm behavior to support their political careers.

Author

• Preston Johnston, Massachusetts Institute of Technology