Dissertation Abstract: Essays in Financial Economics and Political Economy

Do corporations owned largely by other firms participate in politics more aggressively? Assuming that political action generates externality to others, this chapter theoretically and empirically investigates how a firm’s political behavior is affected by its financial structure. I first derive the optimal political expenditure under two behavioral assumptions: shareholder-value and firm-value maximization. Next, I compare the theoretical predictions to the empirical pattern found in a data set of Japanese corporations publicly traded from 1991-2003. The data show that the number of retired bureaucrats in a private firm’s boardroom, the measure of political activity of the firm, is negatively correlated with the share of equities held by nonfinancial firms, and positively with that held by financial institutions. The findings are largely consistent with the theoretical predicution under the assumption that i) there exists positive political externality between financially interlinked firms, and ii) firms maximize their own profit and the value of assets they hold.