ABSTRACT | Comment

It pays to be a crony: on the politician-businessman nexus in the U.S.

Access to politicians gives big businessmen the chance to influence government policy in a manner that is beneficial to them. For instance, government regulations are often framed to serve the interests of certain companies that are close to the government and harm competitors. Even government contracts, which are worth many billions each year, are handed out to parties who offer the highest kickbacks to politicians. So, it is no surprise when corporate executives rush to the corridors of power to donate massive sums of money to get what they want. Yet, except perhaps after a massive fraud that gets exposed by a whistle-blower, it is often hard to find solid evidence to prove the nexus between politicians and businessmen.

To help us get closer to the truth, a 2017 paper circulated by the National Bureau of Economic Research, titled All the President’s Friends: Political Access and Firm Value, tries to offer some empirical evidence. The authors, Jeffrey Brown and Jiekun Huang, studied data on visitors to the White House from 2009 to 2015 and found in the database the names of several corporate executives from S&P 1500 companies.

They then studied the performance of the stocks of the companies whose executives frequented the White House. This was to see if executive visits to the White House had any positive impact on stock prices. It was found that stock prices indeed showed abnormal returns just around the time when their company executives visited the White House. This, the authors argue, is likely because these companies received political favours after meeting the President’s staff. In fact, they say, the companies received relief from stringent regulations just after meeting White House officials.

Brown and Huang also found that executives belonging to companies that contributed heavily to former U.S. President Barack Obama’s election campaign were more likely to be granted access to the White House during his tenure. Interestingly, stocks of companies that did well after receiving favours under the Obama presidency began to underperform the stocks of similar companies after the surprise election victory of Donald Trump in November 2016. This probably suggests that investors expected these firms, which benefited under the rule of Obama, to lose out on such favours under the Trump presidency.

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Printable version | Sep 27, 2021 4:40:51 AM | https://www.thehindu.com/opinion/op-ed/it-pays-to-be-a-crony/article22935713.ece

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