In new research, Claire Liu and Jared Stanfield examine how relationships between corporate leaders and the United States president enable firms to capture regulation and avoid antitrust scrutiny.
Connections between corporate leaders and politicians and how these connections influence fair competition and principled regulation have been a topic of interest for academics and policymakers for decades. Several high-profile instances in the United States of political connections favoring certain corporations have shined a harsher light on what the literature calls corporate political connections. For example, Hunter Biden, the son of then-Vice President and later President Joseph Biden, sought assistance from the U.S. government on behalf of Burisma, a Ukrainian gas company where Hunter was a board member. Additionally, President Donald Trump’s businesses benefited from contracts with the U.S. government and foreign governments during his first term as president.
Firms may use political connections to obtain favorable legislation, tax treatment, or regulation that benefits their entire industry, geographic area, or is specific to their own firm. For example, companies have recently intensified artificial intelligence lobbying in Washington to ensure that AI laws are favorable to industry interests—securing government funding, limiting safety and copyright constraints, and reinforcing market dominance amid antitrust and IP challenges. Nobel Prize-winning economist George Stigler showed that firms may use political connections to engage in regulatory capture, where the institutions that are meant to regulate firms or industries are instead influenced or controlled by the same firms (or industries) to regulate for their benefit. One particularly important area of regulation in the U.S., and one familiar to readers of ProMarket, is the antitrust enforcement of mergers and acquisitions. The purpose of our study is to directly examine whether corporate political connections between the U.S. president and corporate board directors lead to regulatory capture of antitrust enforcement.
Why should we care about corporate ties to the U.S. president?
The executive branch, which the president leads, plays a central role in shaping and enforcing regulations and policies through its many departments and agencies that impact firm actions and outcomes. Unlike the more diffuse power structure of the legislative branch focused on broad laws that rarely regulate at a level more granular than a specific industry, executive authority is concentrated, can target specific firms, such as through merger review, and can be leveraged swiftly. The nature of executive authority makes it particularly relevant for firms navigating regulatory environments or seeking regulatory advantages.
The president specifically has the power to appoint the heads of federal departments and agencies. The president is thus able to influence the direction of policy and regulation. Given that these agencies often interact with specific firms, the president has the power to influence these actions targeting individual firms. Large corporate mergers often trigger antitrust review by one of the two executive agencies that oversee antitrust and competition policy: the Department of Justice Antitrust Division and Federal Trade Commission. The presidents appoints the heads of both agencies.
How do we measure corporate political connections and why?
We measure corporate political connections between politicians and the members of a firm’s board of directors using shared social and professional ties. A firm is politically connected to the president if at least one board director shared contemporaneous social and professional activities with the president for at least one year. These could include memberships and directorships of social clubs, not-for-profit organizations such as trusts, universities, and other non-business associations like charities. It could also include work experience in public or private businesses.
We use social and professional connections as our measure of corporate political connections rather than lobbying expenses or direct corporate (or individual) political contributions because the president is generally less dependent on “hard money” political donations made by corporations relative to members of Congress. Further, this allows us to capture connections to unelected presidential appointees in the executive branch as well. Additionally, since personal ties are not disclosed systematically like donations, they are less transparent and potentially allow for stronger regulatory capture.
Are political connections to the president valuable to firms?
We first study whether these shared social and professional ties to the president lead to higher firm value. This is difficult to measure because it could be that firms with shared social and professional ties tend to have some other characteristic (for example, skilled managers), which leads them to have higher values. In addition, firms with connections to Democrats may be fundamentally different than firms with connections to Republicans. For instance, firms connected to Democrats have more debt and undertake more R&D and have higher corporate social responsibility ratings. Finally, a firm led by, for example, a Democratic-leaning board of directors may benefit from the policies of a Democratic president, even without being connected to the president. These potential factors make it difficult to untangle causality.
To overcome potential party influences, we study whether firms connected to the winner or loser of presidential primary elections change in stock market value. Presidential primary elections in the U.S. follow a process by which voters of each major political party (Democratic or Republican) select their party’s nominee for the general election. Several early state presidential primaries, such as Iowa and New Hampshire, are considered crucial for candidates to secure the presidential nomination. We use the election outcomes of 13 early state primary contests with close margins of victory over the 2004-2016 period. We use close elections, because these are difficult to predict in advance, making them more likely to be a surprise and trigger a stock market response.
Our results suggest that directors’ personal ties to the presidential primary winner, rather than just the winning party, create significant value for firms. Firms connected to the winning presidential primary candidate have significantly higher returns (an increase in firm value of 1%, or roughly $45 million per primary election) relative to firms with boards of directors that are connected to the same party but are not connected to the winning candidate.
Do firms with connections engage in regulatory capture through antitrust enforcement?
The potential for regulatory capture through merger antitrust enforcement outcomes represents one possible channel connecting political connections to the president to firm value. We study the effect of political connections between firms and the sitting president on domestic mergers over the period of 2000-2016 (covering the presidencies of Republican President George W. Bush and Democratic President Barack Obama). Our sample ends in 2016 to allow the inclusion of the full terms of each president while avoiding the potentially confounding effects of the COVID-19 pandemic during the last year of President Donald Trump’s first term in office.
Using this sample, we find evidence consistent with firms engaging in regulatory capture. Firms with directors who have shared social or professional connections with the president are 17% less likely to have their merger challenged by regulators when they attempt to acquire another firm. This effect is not driven by a particular political party; we find consistent evidence across the full terms of the Bush and Obama presidencies. It does not appear that this result is due to connected firms avoiding “risky” mergers or engaging in less merger activity. This effect is even stronger for the types of deals that generally are more likely to be challenged by antitrust regulators: mergers between industry rivals and larger bidders. In fact, connected firms are approximately 7.4% more likely to make these challenging deals. Further, we find that the stock market anticipates these effects. Specifically, firms connected to the president with positive merger announcement stock returns are even less likely to face regulatory challenges.
We also find evidence that connections between firms and the commissioners of the FTC and employees of the DOJ antitrust division reduce the likelihood that a firm’s merger will be challenged by regulators. For example, we find that bidders connected to the president are 15% less likely to face antitrust challenges by regulators, while firms with connections to both the president and an FTC commissioner are 36% less likely in total to face challenges. We find similar effects for connections to DOJ employees. Importantly, we find that the beneficial effect of these agency connections only exists in tandem with connections to the president.
What about unconnected firms or firms with the “wrong” types of connections?
We also find that regulatory capture is costly for firms connected to the primary election opponents of the president or who are rivals of firms that are connected to the president. These firms are more likely to face an antitrust challenge by regulators by 9% and 3%, respectively.
Taken together, our study documents evidence that firms’ political connections to the president, as well as political appointees in the FTC and DOJ, are valuable and decrease the likelihood of facing antitrust challenges to their mergers and acquisitions, despite engaging in deals that would generally be more likely to face merger review. Finally, in addition to potentially negatively impacting the competitive environment by reducing the likelihood of antitrust review, we show that these connections also disadvantage unconnected industry rivals and firms connected to the “wrong” politician, potentially exacerbating the competitive distortions of these deals.
Author Disclosure: The authors have no conflicts of interest to disclose. This includes, but is not limited to, financial interests, personal relationships, academic competition, or intellectual beliefs that could have influenced the work reported in this paper. Dr. Claire Liu is the corresponding author. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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