Lobby or Contribute? The Impact of Corporate Governance on Firms' Political Strategies

This paper theoretically and empirically studies the impact of corporate governance level on firms’ choice in two political strategies: lobbying and making political contributions. The theoretical model implies that managers with short-run personal interest, prefer making political contributions; while shareholders caring about firms’ longterm success, are willing to do informational lobbying. At equilibrium, a higher level of corporate governance positively affects the efficiency of the decision making process. Using data from U.S. in the 1998-2006 periods, I confirm the main theoretical predictions: (1) Firms only doing lobbying outperform those only making contributions in the corporate governance level. (2) Firms with higher shareholder power do more lobbying. (3) Fewer firms with high shareholder power would make contributions than those with high manager power. However, once they do, they contribute more than the latter because of the informational externality effect. Therefore, if corporate governance level is improved, fewer contributions will be made by firms. JEL Classification: G32, G34, D72.