Three Essays in Political Economy and Corporate Finance
This dissertation consists of three essays exploring the issues related to the political economy of finance and corporate finance. The first essay studies whether and how institutional investors exert influence in firms’ external governance environments related to law and politics. I explore the role of institutional investors in corporate lobbying of their portfolio firms. I find that greater lobbying institutional ownership leads to more lobbying activities of firms. This effect is more pronounce in the subsample where firms face constraints to lobbying. I identify two plausible channels through which institutional investors can facilitate corporate lobbying. First, institutional investors tend to provide direct support by lobbying in the same congressional bills with firms possessing greater weights in their portfolios. Second, institutional investors protect firms’ political information by voting against shareholder proposals requesting additional lobbying disclosure. Overall, I show that lobbying institutional investors actively engage in firms’ external governance related to law and politics. The second essay takes a unique insight into the ethics of corporate lobbying. We study the Honest Leadership and Open Government Act of 2007, a regulatory reform on lobbying and government ethics, aiming to mitigate unethical lobbying activities. We find that the average market reaction to the reform, which aimed to mitigate unethical lobbying practices, by lobbying firms is positive, implying the reform benefited these shareholders on average. We also uncover heterogeneity of lobbying firms’ response to the reform. Following the Act, firms with a history of active lobbying reduced their lobbying activity, whereas firms with little prior lobbying activity increased their lobbying efforts. Finally, we find that after the enactment of these reforms, firms that engage in active lobbying, and especially those with a good ethical reputation, are more likely to appoint politically connected directors relative to non-lobbying firms. The third essay focuses on the dark side of corporate lobbying on firms. Specifically, we investigate the impacts of lobbying engagement on corporate innovation. One percent increase in lobbying expenditures reduces the number of patents by 30 bps, the number of citations by 50 bps, and the average patent value by 50 bps. We find that more corporate lobbying activities causally impedes innovation, in contrast to the conventional stewardship perspective that lobbying brings government privileges. We find that the effects of corporate lobbying on innovation are stronger in the subsample where firms have more resources constraints and lower institutional ownership, which are constituent with both “resources constraints” and “lazy managers” hypotheses.