Wednesday, June 7, 2017

How does executive visits to the White House affect firm prospects?

The Economist points to this fascinating study by Jeffrey Brown and Jiekun Huang which examined publicly available records of visits made by corporate executives to White House during the 2009-15 period and how it benefited the company. The benefit was measured in terms of the share prices of those firms, winning government contracts and regulatory relief in the aftermath of the visits. Their findings are unambiguous,
Consistent with money buying access, we find that political access is positively correlated with firms’ contributions to politicians’ election campaigns. We also find that corporate executives’ meetings with key policymakers are associated with positive abnormal stock returns. We further find evidence suggesting that following meetings with federal government officials, firms receive more government contracts and are more likely to receive regulatory relief (as measured by the tone of regulatory news). The investment of these firms also becomes less affected by political uncertainty after the meetings. Using the 2016 presidential election as a shock to firms’ political access, we find that firms with access to the Obama administration deliver significantly lower stock returns following the release of the election result than otherwise similar firms that do not have access.
The authors have taken great pains to isolate the selection bias confounders - the visitors were those with genuine problems and the visit led to the resolution of their problem, with attendant share price boost or bag the contract or get a favourable regulatory review.

They find that the shares of firms tend to outperform industry peers by 0.33% and 0.78% after 10 and 60 trading days of the meeting, with the outperformance being greater the more senior the White House host. Further, the average firm also generates $34 million in profit from incremental government contract volume due to the political access. In fact, they also find that about two-thirds of the increase in procurement contracts is due to non-performance based contracts and those which are awarded on a non-competitive basis, both more likely to be associated with higher rents, thereby suggesting that political access enhances firm value. Or cronyism is the contributor!

The roll call of frequent visitors included
The sheer scale of access to the highest office in the land is staggering. Even with the gravest existential problems, having such almost unfettered access to the White House is disturbing. At best, in very serious cases, the CEOs could have brought the matter to the notice of the President or his office and then engaged on substance with the respective Departments. Instead, here they have engaged directly with the highest office even on substantial processes and negotiations, bypassing the departments. 

Imagine the signals such frequent access communicate to everyone in the establishment. This is exactly what people mean when they talk about political capture and the attendant ability to make and game the rules themselves. The authors also point to some anecdotal evidence of how such influence pays, 
For example, a Wall Street Journal (2015) article claims that Google executives’ frequent visits to the White House were instrumental in Federal Trade Commission’s decision to drop its antitrust investigation of the company. As another example, commenting on the close ties between General Electric and the federal government, a Washington Examiner (2010) article notes that “Obama wants cap-and-trade, GE wants cap- and-trade. Obama subsidizes embryonic stem-cell research, GE launches an embryonic stem-cell business. Obama calls for rail subsidies, GE hires Linda Daschle as a rail lobbyist.”
Similarly, Goldman CEO Lloyd Blankfein had almost hotline access to the US Treasury Secretary and his predecessor, Mr Hank Paulson, during the peak of the sub-prime crisis. And this was at a time when Goldman was itself effectively bailed out. Or one ex-Goldman CEO using public money to bailout his successor!

If this were India, the knives would have been out and accusations of crony capitalism would have all over the place. Even when corruption is rampant, there is at least some pretension to prevent such unfettered official access. Just to highlight this reality, one of the important basis on which CBI field chargesheet against the former Coal Secretary, Mr P C Parakh is that Mr Kumarmangalam Birla, the Chairman of the Birla Group, and the accused in the case, met him in his office in the Ministry on an official meeting just before the decision on coal block allotment was made. 

For the record, Donald Trump has already declared that he will not be making White House visitor log public!

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