With other people’s money: Campaign financing as an agency problem

• Published in: Journal of general management Vol. 45; no. 1; pp. 40 - 49
• Main Authors: Gama, Marina Amado Bahia, Galilea, Gisele Walczak, Bandeira-de-Mello, Rodrigo, Marcon, Rosilene
• Format: Journal Article
• Language: English
• Published: London, England SAGE Publications 01-10-2019; Sage Publications Ltd
• Subjects: Agency theory; Companies; Corporate governance; Financing; Money; Political behavior; Political campaigns; Political participation; Politics; Resource allocation; corporate governance; donation to election campaign; earning quality; accruals; corporate political behavior; corporate political activity
• ISSN: 0306-3070; 1759-6106
• DOI: 10.1177/0306307019861814

Agency theory explanations for corporate political activity assume that managers distort resource allocation to invest in political connections to pursue personal benefits. While distorted resource allocations yield poor earning quality, we expect that companies with efficient governance may curb this opportunistic behavior. We used matching procedures to identify the effects of financing political campaigns on the earning quality of the firm. We assembled an original panel of listed firms in Brazil from 1998 to 2013. We found that firms that donated to electoral campaigns had a lower earning quality than nondonor firms. Firms with superior corporate governance instruments were able to reduce the harmful effects on earning quality. These results support the tenets of agency theory in explaining why firms engage in politics.