Corporate lobbying pays off for firmsApr. 16, 2008, 11:21 AM
A new study examining the connection between corporate lobbying at the federal level and financial performance finds that lobbying pays off.
David Parsley, professor of management at Vanderbilt’s Owen Graduate School of Management, is co-author of Corporate Lobbying and Financial Performance with Hui Chen of University of Colorado and Ya-Wen Yang of the University of Miami.
The new findings suggest that lobbying activities significantly and positively impact the bottom line of companies who do it. In addition, lobbying expenses appear to positively impact firms’ stock prices and returns.
The authors constructed portfolios of firms according to whether and how much they lobby. According to the study, the main benefits of lobbying accrue to firms that lobby most intensively – portfolios of such firms consistently outperform the market, Parsley said.
“We find that lobbying firms do very well. The real trick is to make sure that our findings are not due to reverse causality. Reverse causality is a problem if firms lobby because they’re doing well to begin with,” Parsley said. The authors argue that this situation is more likely for firms with poor governance. The study finds no evidence of reverse causality however, since firms with lower governance scores do not, on average, lobby more.
The researchers also had to determine whether firms who lobby do so because they are in a unique position to benefit. If so, the study’s conclusions would not generalize to other firms.
“It’s a bit like evaluating the effect of getting a higher education on someone’s income. If we conclude, by looking at the incomes of people with higher degrees, that education pays, we may be missing an important point. Education may only raise the incomes of those people who like to study and are able to graduate,” Parsley said.
Lobbying is similar since firms decide whether to lobby. However, even after accounting for this possibility, the study’s findings remain statistically significant, he said.
This new study is novel in its focus on the impact of lobbying expenditures on the bottom line of the firms actually making the expenditures. Other research studies have examined the political involvement of entities affiliated with corporations, also called Political Action Committees (PACs), rather than direct corporate lobbying, and have focused on election outcomes or voting behavior.
Corporate lobbying is roughly 20 times larger than PAC spending, and many more firms lobby than have affiliated PACs. “Studying lobbying expenditures can help resolve some questions remaining from previous studies. For example, linking voting behavior to PAC donations is difficult given the role of committees and omnibus legislation,” Parsley said.
The Lobbying Disclosure Act (LDA) of 1995, which requires firms to provide detailed information on lobbying activities every six months, has made the kind of data used for this study more readily available. Prior to passage of the act, corporations were not required to provide such information.
The Center for Responsive Politics, which helped compile LDA information, reports that total lobbying expenditures at the Federal level grew from $1.44 billion in 1998 to $2.41 billion in 2005, a 67 percent increase in seven years. The pharmaceutical industry, followed by insurance companies and electric utilities, spends the most on lobbying.
A question for future study, the authors said, is what is keeping even more firms from engaging in lobbying activities, given the positive outcomes? The researchers conjecture that since lobbying firms tend to be large, size may be a mitigating factor. The researchers also note that lobbying may be an effective strategy only to the extent that other firms remain politically inactive.
A link to the current paper can be found at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1014264.
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