Essays in law, politics and corporate finance

Akey, Pat (2014) Essays in law, politics and corporate finance. Doctoral thesis, University of London: London Business School.

Abstract

This thesis examines some of the interaction between law, and politics and corporate finance. These institutions help shape the incentives of firms and other economic actors. One section of this thesis investigates the value of firm political connections to U.S. congressional candidates in close elections using a regression discontinuity design. It describes the federal political institutions in the United States and construct a database of contributions from publicly traded firms to candidates for federal office. In a sample of o-cycle special elections, set exogenously to the contributing firms, the author compares the outcomes of firms that contributed to winning candidates to firms that contributed to losing candidates, and finds the wedge between these firms to be 1.7% to 6.8% of firm equity value. The author studies which congressional committee assignment seats are most valuable to examine which areas of policy matter most and shows that these connections matter for future sales. The author then documents additional actions that firms take to develop and maintain their political connections {lcub} engaging professional lobbyists and directly employing former government employees {lcub} and shows that these actions seem to form a cohesive political strategy. A second section of the thesis studies incentives in civil litigation cases in the United States. The author describes how the institutional setup of the United States' class action shapes the incentives of plaintis and defendants and examine whether the market learns about firms by observing their behavior during litigation. The author develops a simple model of litigation and show that with information asymmetries firms may have an incentive to engage in costly litigation to prevent future lawsuits. The author examines the value implications of a firm's decision to settle a class action lawsuit and provides evidence consistent with the model, showing that firms which exit litigation by settlement trade at lower Q ratios. This reduction is not driven by profitability, leverage, size, or bankruptcy risk. Furthermore, firms that ultimately settle, but spend more money during litigation prior to settlement trade at higher Q ratios.