Government and Regulatory Issues

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Sheraton Ballroom II
Hosted By: American Finance Association
  • Chair: Mara Faccio, Purdue University

The Political Economy of Financial Innovation: Evidence From Local Governments

Christophe Perignon
,
HEC Paris
Boris Vallee
,
Harvard Business School

Abstract

We present an empirical investigation of the development of an innovative and high-risk type of borrowing for local governments, the so-called structured loans. Their adoption is more frequent for politicians from highly indebted local governments, from politically contested areas, and during political campaigns. We also show that using structured loans helps incumbents get re-elected, and initially allows them to maintain lower taxes. Conversely, structured loan usage is hard to empirically reconcile with politicians’ ex post claim that they do not understand the transactions. Our findings illustrate how financial innovation can amplify principal-agent problems within the political system.

Political Information, Firm Value and Information Networks: Evidence From the Chinese National Social Security Fund

Yong Li
,
University of Queensland
Karen Benson
,
University of Queensland
Robert Faff
,
University of Queensland

Abstract

The purpose of this paper is to analyze the existence and impact of the policy information advantage, held by a government-backed institutional investor, on firm performance. The Chinese National Social Security fund (CNSSF) is used as our “laboratory” – wherein the CNSSF represents a major state sponsoring institutional investor in China with dual roles and a deep information network. Our results show a short-run positive and significant information advantage-stock performance linkage. In contrast, the long-run linkage is negative. We document that there is a network spillover of the information advantage across the Chinese mutual fund industry.

Political Influence and Government Investment: Evidence from Contract-Level Data

Jonathan Brogaard
,
University of Washington
Matthew Denes
,
University of Washington
Ran Duchin
,
University of Washington

Abstract

We use contract-level data to study the effect of corporate political influence on the allocation, design, and real outcomes of government contracts. To isolate the treatment effect of political influence, we focus on campaign contributions in close elections and the 2009 American Recovery and Reinvestment Act. Firms with political influence win more contracts, with larger amounts, weaker competition, and looser oversight, and successfully renegotiate contract terms. While preferred access to government contracts improves performance and output, contractual laxity exacerbates agency problems and erodes efficiency. Overall, we provide estimates of the dual effect of political influence on firm outcomes.

Policy Uncertainty, Political Capital, and Firm Risk-Taking

Pat Akey
,
University of Toronto
Stefan Lewellen
,
London Business School

Abstract

We link the cross-section of firms' sensitivities to economic policy uncertainty to their subsequent political activity and post-election risk-taking and performance. We first show that firms with a high sensitivity to economic policy uncertainty donate more to candidates for elected office than less-sensitive firms. Using a sample of close U.S. congressional elections, we then show that plausibly exogenous shocks to policy-sensitive firms' political capital bases produce large subsequent changes in these firms' investment, leverage, firm value, operating performance, CDS spreads, and option-implied volatility. We do not find similar effects among less policy-sensitive firms, suggesting that many existing results in the political connections literature appear to be driven by policy-sensitive firms. Our results provide a new explanation for corporate political contributions and represent the first attempt in the literature to link firms' government policy sensitivities with their investments in political capital and subsequent performance.
Discussant(s)
Larry Fauver
,
University of Tennessee
Martijn Cremers
,
University of Notre Dame
Stefano Rossi
,
Purdue University
Alexei Ovtchinnikov
,
HEC Paris
JEL Classifications
  • G3 - Corporate Finance and Governance