Abstract

Chapter one of my Ph.D. thesis focuses on the equity returns of politically active and inactive firms. On aggregate, firms which operate an affiliated political action committee (PAC) outperform firms that do not. However, among firms that operate a PAC, I find that those that spend relatively less on politics (adjusted for size and industry) outperform those that spend more and that political risk is successfully hedged by firms that are relatively more politically active than their peers. This latter difference in performance is largely (but not entirely) explained by exposure to systematic political risk, and there is a component to political risk that is orthogonal to commonly considered risk factors.

Chapter two of my thesis focuses on the political environment in which a firm operates and how this impacts the optimal capital structure of the firm. Politicians frequently derive a political benefit from imposing costs on firms. Nevertheless, politicians do not want firms to become financially distressed or enter bankruptcy as this affects their electoral prospects. Firms are therefore able to use debt to limit the impositions placed on them by politicians. As the marginal benefit that accrues to politicians of imposing costs on firms decreases, firms optimally decrease their debt levels. Using U.S. data, I show that large firms lower their debt levels on the order of 15-20% when friendly politicians chair senate committees that are relevant to their industry.

Chapter three of my thesis focuses on the determinants of corporate PAC activity. Corporate political action committee (PAC) data has been used to identify politically favored/connected firms and has been found to predict such things as stock returns and capital structure. However, the interpretation of corporate PAC data is not clear and the endogeneity problems it raises muddy the results of studies that use it; PAC activity may have little to do with the political process. This study describes the characteristics of firms that form PACs. Firm characteristics (such as size, market-to-book ratio, profitability, stock price volatility, etc.) explain the majority of corporate PAC activity. There is limited evidence that managerial hubris/distractedness also increases a firms' level of political activity. Importantly, measures of the intrinsic political value of a firm also predict higher levels of PAC activity. PAC data, therefore, does contain useful information as to the political connectedness of firms, but the information is noisy.