A Closer Look At Politically Connected Corporations: Evidence From Citizens United
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.
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.
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.
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.