THREE ESSAYS ON CORPORATE-POLITICAL RELATIONSHIPS _____________________________________________ A Dissertation presented to the Faculty of the Graduate School at the University of Missouri-Columbia _____________________________________________ In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy _______________________________________________ by ANNA ABDULMANOVA Dr. Stephen Ferris, Dissertation Supervisor MAY 2018 i The undersigned, appointed by the dean of the Graduate School, have examined the dissertation entitled THREE ESSAYS ON CORPORATE-POLITICAL RELATIONSHIPS presented by Anna Abdulmanova, a candidate for the degree of doctor of philosophy, and hereby certify that, in their opinion, it is worthy of acceptance. Professor Stephen Ferris Professor John Howe Professor Karen Schnatterly Professor Adam Yore Professor Matteo Arena ii ACKNOWLEDGEMENTS I thank my advisor Dr. Stephen Ferris and the members of my dissertation committee Dr. John Howe, Dr. Karen Schnatterly, Dr. Adam Yore, and Dr. Matteo Arena. I appreciate helpful comments and suggestions from Pratik Kothari and participants of seminars at the University of Missouri, University of Denver, and University of Wisconsin Milwaukee. I also thank National Archive of Criminal Justice Date and Institute for social research at University of Michigan for providing the data on civil litigation. ii TABLE OF CONTENTS ACKNOWLEDGEMENTS ................................................................................................ ii LIST OF TABLES ...............................................................................................................v ABSTRACT ...................................................................................................................... vii Chapter 1. INTRODUCTION ....................................................................................................1 2. A THEORY OF CORPORATE-POLITICAL RELATIONSHIPS ..........................4 Human relationships ..................................................................................................4 Business relationships ...............................................................................................6 Corporate costs and benefits ......................................................................................9 Politicians’ costs and benefits .................................................................................19 Mutual decision to establish political relationship ..................................................24 The empirical evidence regarding political connections .........................................29 3. POLITICAL CONNECTIONS AS AN ELEMENT OF LITIGATION DEFENSE ...................................................................................................... ...34 Introduction .............................................................................................................34 Motivations for political connections and their mechanics .....................................39 Hypotheses development .........................................................................................42 Data and sample ......................................................................................................52 Main results .............................................................................................................58 Robustness tests .......................................................................................................80 Conclusion ...............................................................................................................83 4. THE EFFECT OF TARGET’S POLITICAL CONNECTIONS ON MERGERS AND ACQUISITIONS ....................................................................................107 iii Introduction ...........................................................................................................107 Value of political connections to targets and acquirers .........................................111 Target’s political connections and the acquisition process ...................................113 Acquirer’s environment and the acquisition process .............................................118 Data construction and sample ................................................................................125 Main results ...........................................................................................................129 Summary and discussion .......................................................................................138 5. THE EFFECT OF POLITICAL WEDGE ON CORPORATE DECISIONS, PERFORMANCE, AND VALUE ...................................................................156 Introduction ...........................................................................................................156 Difference in political orientation and its effect on a firm ....................................159 Data and sample construction ................................................................................163 Empirical results ....................................................................................................167 Robustness tests .....................................................................................................177 Conclusion and implication for further research ...................................................180 APPENDIX 1. PROPENSITY SCORE MATCHING ..................................................................199 REFERENCES ................................................................................................................202 VITA ................................................................................................................................214 iv LIST OF TABLES Table Page 1. Sample Descriptive Statistics ...................................................................................85 2. Lawsuits Distribution ...............................................................................................86 3. Summary of Political Contributions .........................................................................88 4. Political Connections and Anticipation of Litigation ...............................................90 5. Political Contributions Made During Litigation ......................................................92 6. Benefits of Political Connections in Litigation ........................................................93 7. Benefits of State Contributions in Litigation ...........................................................95 8. Limitations of Political Connections in Litigation ...................................................96 9. Complex Litigation ..................................................................................................98 10. Government Entity as a Plaintiff ............................................................................100 11. Litigation in the State of Head Quarters .................................................................102 12. Self-Selection in Political Contributions ................................................................104 13. Selection Bias .........................................................................................................106 14. Mergers and Acquisitions Summary ......................................................................142 15. Targets and Acquirers Characteristics ....................................................................145 16. Deals Summary ......................................................................................................147 17. Acquirers’ Type and Deal Completion ..................................................................149 18. Acquirers’ Type and Deal Characteristics .............................................................151 19. Acquirers’ Type and Target Premium ....................................................................152 20. Acquirers’ Country Characteristics and Target Premium ......................................154 21. Descriptive Statistics of Firms and CEOs ..............................................................183 v 22. Statistical summary of Political Variables .............................................................184 23. Distributions of Political Variables ........................................................................185 24. Political Wedge and Allocation of Resources ........................................................186 25. Political Wedge and Quality of Acquisitions .........................................................188 26. Political Wedge and Firm Performance .................................................................190 27. Political Wedge and Firm Value ............................................................................191 28. Size of Political Wedge and Firm Performance .....................................................194 29. Firm and CEO Political Spending ..........................................................................195 30. Effect of Regulatory Changes on Political Wedge .................................................197 31. Comparison of Target and Control Firms ...............................................................201 vi ABSTRACT This study examines the effect of corporate-political relationships on corporate decision making, performance, and value. In the first essay, presented in Chapter 3, I examine whether defendant firms use their political connections as an element