A closer look at politically connected corporations: evidence from Citizens United
ISSN: 0307-4358
Article publication date: 4 April 2019
Issue publication date: 16 May 2019
Abstract
Purpose
The purpose of this paper is to examine the effects of political connections surrounding an exogenous Supreme Court decision (Citizens United) that lifted long-standing restrictions on corporate political contributions.
Design/methodology/approach
This study examines key characteristics of politically connected firms compared to non-politically connected firms, including their market reaction to Citizens United, as well as cash holdings levels and governance characteristics before vs after the landmark decision.
Findings
The results indicate a significant negative market reaction to politically connected firms surrounding the announcement of Citizens United. Additionally, there is a significant increase in the cash holdings of politically connected firms relative to before the event and relative to non-politically connected firms. For politically connected firms, this result is exacerbated by poor corporate governance quality. Collectively, these findings are consistent with a positive association between agency costs and political connections.
Originality/value
This study provides novel evidence by exploiting an exogenous enhancement in the implications of political connections that accompanied the Citizens United decision. The use of this quasi-natural experiment offers an ideal research setting to extract fresh insights into the effects of corporate political connections.
Keywords
Acknowledgements
The authors would like to thank an anonymous referee, Tor-Erik Bakke, Tom Bates, John Coates, Jeff Coles, Louis Ederington, Mara Faccio, Chitru Fernando, Jarrad Harford, Kate Holland, Shane Johnson, Hamed Mahmudi, William Megginson, Felix Meschke, Wayne Thomas, Ralph Walkling and workshop participants at the University of Oklahoma and the 2013 Financial Management Association Annual Meeting for helpful comments and suggestions, and gratefully acknowledge financial support from the University of Oklahoma.
Citation
Newton, A.N. and Uysal, V.B. (2019), "A closer look at politically connected corporations: evidence from Citizens United", Managerial Finance, Vol. 45 No. 5, pp. 637-653. https://doi.org/10.1108/MF-05-2017-0147
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited