Does the revolving door swing both ways? The value of political connections to US firms

Reza Houston (Trulaske College of Business University of Missouri Columbia, Missouri, USA)
Stephen Ferris (University of Missouri)

Managerial Finance

ISSN: 0307-4358

Publication date: 12 October 2015

Abstract

Purpose

The purpose of this paper is to analyze the value of corporate political connections resulting from the revolving door of employment between political office and the for-profit corporation. The authors test whether there is value to firms from political connections provided by the appointment of former politicians to corporate boards or management teams. The authors also test to see if passage through the door in the other direction, from the corporate world to public office, generates value for firms. Do firms whose former employees gain public office earn excess returns following their appointment or election to these positions?

Design/methodology/approach

The methodology used in this study focusses on an empirical analysis of the political connections of US firms over the sample period 1996-2011. The analysis emphasizes the wealth effects associated with the announcement of hiring former politicians to corporate boards or the gaining of political office by former corporate employees.

Findings

The authors find that politicians becoming corporate directors is 2.5 times more common than corporate executives gaining public office. The authors determine that industries with extensive government regulation most often hire former politicians. The authors find that the office held by former politicians matters. The authors find that longevity in a cabinet position is important while formal Congressional or Senate leadership positions are not. Surprisingly, the authors determine the longer politicians are out of office, the more value they are able to provide to the firm. Finally, the authors discover that firms which hire former politicians have significantly positive long-term abnormal returns, but firms whose managers enter politics do not.

Originality/value

This study is highly original in its examination of political connections resulting from door swing in both directions. Further, the analysis of longevity, time out of office, and position held adds to the contributions made by this study.

Keywords

Citation

Houston, R. and Ferris, S. (2015), "Does the revolving door swing both ways? The value of political connections to US firms", Managerial Finance, Vol. 41 No. 10, pp. 1002-1031. https://doi.org/10.1108/MF-08-2014-0215

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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