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Economics of Governance

Erschienen in:

15.03.2018 | Original Paper

The impact of political connections on government bailout: the 2008 credit crunch in the United States

verfasst von: Seung-Hyun Lee, Mine Ozer, Yoon-Suk Baik

Erschienen in: Economics of Governance | Ausgabe 4/2018

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Abstract

Why is there so little money in contributions to political action committees (PAC) in United States’ politics? While there may be several explanations for this puzzle, we consider corporate PAC contributions as an insurance-like instrument that induces firms’ expectations of safeguard at times of grave need, with the 2008 credit crunch as a case in point. Given the unlikely occurrence of a credit crunch, few financial firms invest in PAC contributions. However, we find firms that make PAC contributions may gain ex ante benefits of corporate PACs as protection from financial distress by undertaking profitable but risky projects that later become illiquid assets while requiring the bailout money during the 2008 credit crunch. We also find that both consistent PAC investments over election cycles and subsequent lobbying activity to corporate PACs further allow firms to utilize their political ties as safeguard and demand additional bailout money. Our instrumental variable analysis confirms that firms with prior experience in political investments are found to enhance the likelihood and effectiveness of PAC contributions and related political investments.

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Of course, super PACs can make a difference, given that under Super PACs, firms can contribute to PACs with no limit. For example, Restore Our Future, a Super PAC that helped Mitt Romney's presidential campaign in 2012, had spent $40 million. Super PACs, however, are a new type of committee resulting from the July 2010 federal court decision (SpeechNow.org v. Federal Election Commission), which occurred 2 years after the 2008 credit crunch. Super PACs are officially known as independent-expenditure only committees.

In fact, corporate PACs and related political investments are beneficial because of either pre-crisis risk-taking behavior for high returns or post-crisis government support. Since the bailout money is the amount of toxic assets that financial firms owned before the 2008 financial crisis, we believe our dependent variable, the amount of bailout money committed is appropriate for capturing the pre-crisis value of corporate PACs and related political investments. Instead, the acceptance of firms’ bailout applications (e.g., Duchin and Sosyura 2012) is suitable for measuring the post-crisis value because the government bailout matters more to firms in financial distress than does the size of the bailout money once the government decides to restore the economic stability.

In addition, we find that PAC contributions work as a connecting line for additional contributions, such as lobbying. While lobbying can be done separately at times of disaster, those firms that are already connected to the right politicians via PAC contributions are in a much better position, compared to those firms that did not have PAC contributions ahead of the disasters. In an unreported result, we also find that those firms that contributed to members of the finance committees in the Senate and House were awarded with more bailout money than their competitors that did not make PAC contributions to the finance committee members. This result is in line with the findings of Kroszner and Stratmann (1998).

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Titel: The impact of political connections on government bailout: the 2008 credit crunch in the United States
verfasst von: Seung-Hyun Lee
Mine Ozer
Yoon-Suk Baik
Publikationsdatum: 15.03.2018
Verlag: Springer Berlin Heidelberg
Erschienen in: Economics of Governance / Ausgabe 4/2018
Print ISSN: 1435-6104
Elektronische ISSN: 1435-8131
DOI: https://doi.org/10.1007/s10101-018-0205-4