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The effects of firm political contributions on earmarks and subsequent firm performance

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  • Huq, Tahsin Imtiazul
  • Hassan, M.Kabir
  • Houston, Reza

Abstract

With the reintroduction of hard earmarks in the United States, it is essential to understand the factors that drive the receipt of earmarks. Earmarks represent a significant source of revenue for many firms. We examine the relationship between political expenditures, federal earmarks, and subsequent firm performance. Using a sample of earmarks from appropriations bills, we demonstrate that firm-affiliated political action committee (PAC) contributions to legislators predict the size and number of earmarks directed to these companies. We also show that PAC contributions to a legislator increase the probability of the legislator writing an earmark benefiting the firm, with an average return of 1090%. Earmarks are associated with greater future profitability, but politically connected earmark recipients exhibit poorer financial performance. Our findings indicate a clear channel through which firms receive value from the US federal government.

Suggested Citation

  • Huq, Tahsin Imtiazul & Hassan, M.Kabir & Houston, Reza, 2022. "The effects of firm political contributions on earmarks and subsequent firm performance," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922000940
    DOI: 10.1016/j.ribaf.2022.101706
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    More about this item

    Keywords

    Earmarks; Firm performance; Political action committee contributions; Political connections;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • K2 - Law and Economics - - Regulation and Business Law

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