Three Essays on the Politics of Firm Performance
Creators: name: Jiang, Kathy
Publisher: name: The Australian National University
Year: 2022

description: United States (US) Congress members have incentives and abilities to pursue interests for their constituents and improve the economic wellbeing of their constituencies. To shed light on the economic consequences of this expected political support from influential Congress members, this dissertation answers the following research questions: 1. Does politicians' economic support for constituents affect chief executive officer (CEO) equity incentives? 2. Does politicians' interference with regulatory enforcement affect investors' forward-looking beliefs about firms' future crash risk? 3. Do politicians affect firms' environmental misconduct enforcement and environmental performance? In the first paper, I first show that having a senator appointed as a powerful chair of a Senate committee significantly increases earmark rewards allocated to the senator's home state. Next, I find that firms headquartered in a state whose senator becomes a committee chair significantly reduce the convexity of their CEO's option-based pay. These reductions are more pronounced for firms with higher government dependence and more geographically concentrated operations. In additional tests, I find that firms actively adjust CEOs' risk-taking incentives by decreasing CEO vega from annual option grants in response to government spending shocks. Finally, I find that the seniority shocks decrease firm risk-taking. Overall, my findings suggest that the positive shock to government spending due to a new committee chair reduces a firm's desired level of risk-taking, which discourages offering equity incentives to the CEO. In the second paper, I argue that such enforcement inaction has two opposing effects on investors' perceived crash risk. On one hand, enforcement inaction can shield firms from regulatory investigations and subsequent negative market reaction, and hence reduce firms' uncertainty and risk. This can curb managerial short-termism, which discourages managers from withholding bad news and engaging in loss-making projects (long horizon hypothesis). On the other hand, enforcement inaction can motivate firm misbehaviour and promote firm opacity, which encourages managers to engage in bad news hoarding and loss-making projects (opaque information hypothesis). I find that perceived crash risk decreases for firms located in the political districts of SEC-influential politicians. I obtain robust results when using politician departure and firm headquarter relocation as two plausible exogenous shocks to the politician-firm link to establish causality. Moreover, I document that the effect is more pronounced for firms with the SEC as a customer and firms seeking political quid pro quos with politicians. Overall, my results support my long horizon hypothesis that investors perceive that SEC-influential politicians can curb managerial short-termism, which disincentivises managers from withholding bad news and engaging in loss-making projects. Thus, investors assess these firms as less crash prone. In the third paper, I find that facilities located in the voting districts of politicians who sit on congressional committees with Environmental Protection Agency (EPA) oversight responsibility incur fewer penalties for environmental misconduct. I also document that this effect disappears when politicians serve on other committees that do not oversee environmental regulation enforcement. Moreover, I document that the effect of influential politicians on firms' environmental misconduct is more pronounced for firms with high lobbying expenses and in the years of Congress election. Finally, I find that firms with facilities located in the voting districts of politicians who sit on congressional committees with EPA oversight responsibility experience a significant decrease in environmental performance. Overall, my results suggest that politicians could impede the EPA's regulatory enforcement efforts and thus affect firms' environmental performance.