Lobby or Contribute? - The Impact of Corporate Governance on Firms' Political Strategies

Abstract

This paper theoretically and empirically studies the impact of corporate governance level on firms' choice in two political strategies: lobbying and making political contributions. The theoretical model implies that managers, who care more about personal interests in short run, prefer making political contributions; while shareholders, caring more about firms' long-term success, are more willing to do informational lobbying. At equilibrium, the efficiency of the decision making process is increasing in the governance level. Using lobbying and contribution data from U.S. in the 1998-2006 period, I confirm the main theoretical predictions: (1) Firms only doing lobbying outperform those only making contributions in the corporate governance level. (2) Firms with higher shareholder power do more lobbying. (3) Fewer firms with high shareholder power would make contributions than those with high manager power. However, once they do, they contribute more than the latter. Therefore, if corporate governance level is improved, fewer contributions will be made by firms.

Keywords: Corporate Governance Level, Informational Lobbying, Political Contributions

JEL Classification: G32, G34, D72