The Relationship between Political Contributions and Federal Earmarks and the Impact of State-owned Enterprises on U.S. Competition

With the reintroduction of hard earmarks in the U.S., it is essential to understand the factors that drive earmark receipt. Legislative earmarks have historically represented a significant source of revenue for several firms. We examine the relationship between political expenditure, federal earmarks, and subsequent firm performance. Using a sample of earmarks from 2008-2010 Appropriations bills, we demonstrate that Political Action Committee (PAC) contributions by firms to Senators and Representatives strongly predict both the size and number of earmarks directed to these companies. We also show that PAC contributions to a member of Congress increase the probability that a politician writes a hard earmark benefiting the firm, leading to an average return of 1,090%. However, PAC contributions to presidential candidates and lobbying expenditure is only marginally effective. Earmark receipt is associated with greater future industry-adjusted profitability, but politically connected earmark recipients exhibit poorer financial performance. Our empirical findings indicate a clear channel through which firms receive value from the U.S. federal government. We also provide evidence that the reintroduction of hard earmarks could negatively impact firm performance. Using acquisition data from 2010-2018, we examine the impact of acquisitions by foreign SOEs on domestic U.S. competitors. We examine the initial response to such acquisition announcements, the attempts of industry incumbents to increase their own political connections, and the profitability and efficiency of such incumbents. When foreign state-owned enterprises (SOE) enter the U.S. market by acquiring domestic firms, they increase competition in the targeted industry. Politically connected market incumbents experience the greatest decline in shareholder value around such acquisitions. Such acquisitions also lead to decreased profitability, increased efficiency, and less reliance on political connections by incumbents