The Impact of Political Connectedness on Cash Holdings: Evidence from Citizens United

What motivates a company to become politically connected and what impact does political connectedness have on corporate policies? To address this question, we exploit an exogenous Supreme Court decision (Citizens United) that lifted all restrictions on corporate political contributions. We find a significant increase in the cash holdings levels of historically politically connected firms relative to both before the event and relative to historically non-politically connected firms. This result is exacerbated by poor corporate governance quality, characterized by busy board members, excessive CEO compensation, and a lack of investor involvement in politically-oriented governing policies. We further document a significantly negative market reaction to politically connected firms surrounding Citizens United. These findings are consistent with a positive association between agency costs and political connectedness. We thank Hamed Mahmudi for helpful comments and suggestions. “At bottom, the Court’s opinion [in Citizens United] is thus a rejection of the common sense of the American people, who have recognized a need to prevent corporations from undermining selfgovernment since the founding, and who have fought against the distinctive corrupting potential of corporate electioneering since the days of Theodore Roosevelt. It is a strange time to repudiate that common sense. While American democracy is imperfect, few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics.” – Dissenting opinion of Supreme Court Justice John Paul Stevens