Follow the money
A new study highlights that the risk-premium costs of lobbying are quantitatively and economically important, even if the resources ‘wasted’ on lobbying seem objectively small.
The challenge:
Corporations report spending $4 billion a year on lobbying, which pales in comparison to the trillions of dollars on public-policy interventions or government contracts. Given that firms spend so little comparatively, is corporate lobbying economically irrelevant? Despite the existing literature on the subject, little is known about the financial effects of corporate lobbying or the relationship between the financial and economic consequences of corporate lobbying. Some scholars argue we should “follow the money”, because allowing firms to “buy” policies implies large, rich firms can extract enormous rents from politics. Other scholars ignore corporate lobbying, because the sums involved are small. The challenge was to try to show the political-risk premium associated with lobbying to determine whether we should, indeed, follow the money trail when it comes to lobbying.
A new study highlights that the risk-premium costs of lobbying are quantitatively and economically important, even if the resources ‘wasted’ on lobbying seem objectively small.
The challenge:
Corporations report spending $4 billion a year on lobbying, which pales in comparison to the trillions of dollars on public-policy interventions or government contracts. Given that firms spend so little comparatively, is corporate lobbying economically irrelevant? Despite the existing literature on the subject, little is known about the financial effects of corporate lobbying or the relationship between the financial and economic consequences of corporate lobbying. Some scholars argue we should “follow the money”, because allowing firms to “buy” policies implies large, rich firms can extract enormous rents from politics. Other scholars ignore corporate lobbying, because the sums involved are small. The challenge was to try to show the political-risk premium associated with lobbying to determine whether we should, indeed, follow the money trail when it comes to lobbying.
The intervention
We designed a model that captured the interaction between financial and real markets to evaluate the real impact of the political-risk premium. This was measured by the difference between the stock returns of high- and low-lobbying firms. The model found an annual 6% to 8% return premium for stocks of high-lobbying firms, which compensated investors for political risk.
The model predicts that if investors ceased seeking compensation for political risk, R&D investment would increase by 6% and the innovation rate would increase by 0.4%. So, the risk-premium costs of lobbying are quantitatively and economically important, even if the resources “wasted” on lobbying seem objectively small.
The impact
The study shows that the political risk-premium cost associated with lobbying deserves greater attention, and that the real and financial effects of corporate lobbying are closely related. Since firms lobby to maximise their value, financial returns drive political competition. At the same time, political competition affects the industry dynamics of risk, increases firms’ opportunity cost of capital and reduces their incentives to make other investments. In other words: follow the money!
