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Power, Scrutiny, and Congressmen's Favoritism for Friends' Firms

Author

Listed:
  • Quoc-Anh Do

    (Monash University and CEPR. Monash Business School)

  • Yen-Teik Lee

    (National University of Singapore, NUS Business School)

  • Bang D. Nguyen

    (University of Cambridge. Judge Business School, Cambridge)

  • Kieu-Trang Nguyen

    (Northwestern University. Kellogg School of Management)

Abstract

Does higher office always lead to more favoritism? The usual affirmative answer overlooks scrutiny's role in shaping the pattern of favoritism: It is possible that politicians who attain higher-powered po- sitions under stricter scrutiny may reduce quid-pro-quo favors towards connected firms. Around close Congress elections, we find RDD-based evidence of this adverse effect that a politician's win reduces his former classmates' firms stock value by 1.9% after a day and 3.2% after a week. This effect varies by cross-state level of scrutiny, politician's power, firm size and governance, and connection strength, and diminishes as a politician's career concern fades over time.

Suggested Citation

  • Quoc-Anh Do & Yen-Teik Lee & Bang D. Nguyen & Kieu-Trang Nguyen, 2023. "Power, Scrutiny, and Congressmen's Favoritism for Friends' Firms," Monash Economics Working Papers 2023-11, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2023-11
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    References listed on IDEAS

    as
    1. Kelly Shue, 2013. "Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers," The Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1401-1442.
    2. Acemoglu, Daron & Johnson, Simon & Kermani, Amir & Kwak, James & Mitton, Todd, 2016. "The value of connections in turbulent times: Evidence from the United States," Journal of Financial Economics, Elsevier, vol. 121(2), pages 368-391.
    3. Pat Akey, 2015. "Valuing Changes in Political Networks: Evidence from Campaign Contributions to Close Congressional Elections," The Review of Financial Studies, Society for Financial Studies, vol. 28(11), pages 3188-3223.
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    Cited by:

    1. Wagner, Wolf & Lambert, Thomas & Zhang, Eden Quxian, 2020. "Banks, Political Capital, and Growth," CEPR Discussion Papers 15612, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Favoritism; Power; Scrutiny; Political connection; Congressmen;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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