Open Collections

Essays on politically connected firms

University of British Columbia

This thesis explores a number of issues related to politically connected firms in two separate chapters. I follow Goldman et al. (2009), defining politically connected firms as those with at least one former politician serving as member of its board of directors, and construct a sample containing the S&P 500 firms between 2004 and 2013. The first chapter explores why firms seek these political connections, and how they benefit from two direct value extraction channels: government procurement and subsidies. I find that firms that aim for government contracts seek executive branch connections, while those that face heavy regulations target congressional connections. Next, I show that politically connected firms do get more government contracts and subsidies. Firm performance (using accounting based measures) suffers with government contracts and subsidies, and political connections fail to increase or decrease this negative relation, which suggests effective safeguards against overpricing and cronyism. However, politically connected firms do seem to enjoy a temporary increase in future ROA, when government contracts are taken into consideration. The second chapter asks if politically connected firms pay higher audit fees, and explores the underlying reasons. Prior studies have mixed implications on how risky these clients are for auditors. On the one hand, some studies suggest politically connected firms have lower accounting quality and face higher political risk, hence incur higher audit fees. On the other hand, less investor pressure and lower litigation and bankruptcy risks would decrease audit fees for firms with political connections. I find that politically connected firms do pay higher audit fees, and the effect is stronger for those with executive branch connections. Neither lower accounting quality nor higher political risk is found to be the underlying reason. The fact that many politically connected firms are government contractors, who are subject to additional regulations and government audit, is found to be the main factor for this difference in audit fee.

Text

2017-10-17

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/63324

Business Administration - Accounting

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/4.0/