The effect of corporate political activity on the financial performance of US public pharmaceutical firms

Corporate political activity (CPA) in the US has received a significant amount of attention from academic research, especially because it involves billions of dollars yearly and because the public is concerned with its undue influence over the legislative process. The predominant view in the literature holds that CPA is positively associated with financial performance, however, evidence is mixed. Prior research also suggests that firms operating in a highly regulated industry, such as pharmaceutical firms, are more likely to engage in CPA. As such, benefits from CPA, or detrimental effects for that matter, should be most visible in such industries. From this stems the purpose and motivation of this study. The purpose of this study is to examine the effect of corporate political activity, as measured by the dollar amounts of PAC contributions and lobbying expenditures, on the financial performance of US public pharmaceutical firms in the period 1998–2013. The study is motivated by the lack of academic consensus regarding the nature of the relationship between CPA and financial performance and by contradictory empirical evidence on the subject. To this end, I conduct a two-stage regression analysis and find that, contrary to the predominant view in literature, CPA is significantly and negatively associated with firm financial performance, as measured by net income and income before extraordinary items. The findings can be best interpreted in the framework of the agency theory to be indicators of risky managerial decision-making, inadequate evaluation of political investments, lack of or insufficient monitoring, or personal managerial consumption of political expenditures