A review of Brown, J. R. and J. Huang, 2020, “All the President’s Friends: Political Access and Firm Value,” Journal of Financial Economics 138, 415-431.
I. Research question and its importance
This paper investigates how and to what extent firm value is affected by its political access. Although this proposition is not new, the paper provides different perspective than many early works that focused on political access to legislative branch of the government (i.e., Congress). Instead, this paper focus on political access to the executive branch. Moreover, the paper fills the gap where the effect of political access over firms was argued by political scientists, however few prior works examine its magnitude. Perhaps the peril of early works was due to lack of available data, which the authors address via the release of White House visitor log since 2009 to gauge firms’ political access, by matching carefully the names of visitors to those of executives in ExecuComp database. Thus, this paper answers an old question with new methods as well as data, shedding light on the effect of political access over firm value.
II. Method, finding, and limitation
The measure of dependent variable, firm value, is cumulative abnormal returns (CARs) for a given set of time windows spanning one day prior to the meeting up to 15 days afterward. The authors apply the measure to all S&P 1500 firms, employing multivariate regressions as a baseline analysis. On top of a series of cross-section analysis, the authors also employ a natural experiment adopting the 2016 presidential election as a shock. Since most of the election predictions were in favour of the Clinton campaign, the victory of Trump was surprising for the firms that maintained close relation to the Obama government. The authors exploit this “shock” to observe the difference in firm value subsequent to the election. Finally, to offer an assessment of regulatory relief as objectively as possible, the authors adopt language tone analysis (i.e., the ratio of positive to negative tone) with the help of the LM (2001) word list which was revised for and widely used by finance research. Based on these sophisticated methodologies, this paper yields three major findings. First, political access is associated with positive abnormal stock returns, at times both when the visit was reported by media and when the log was released by the White House, implying the market does reflect the information. Second, following their meetings with federal officials, firms are more likely to receive government contracts (as DiD estimates show) and regulatory relief (measured by news tone). Finally, following the surprising failure of Clinton campaign on 2016 presidential election, firms with more political access to Obama government experience significantly lower stock returns.
III. Future research
This paper distinguishes itself among others by its strength in measurement as well as methodology, which enable it to answer the old question with new evidence. Two thoughts for future research: (i) relative distance between the visitor and visitee shall be taken into consideration for that can affect cost and hence, frequency of such visits; (ii) albeit measuring political access via government visit is reasonable, the access can be better measured by social network analysis (e.g., attendance to same sets of event) upon data availability.