HLS Forum on Corporate Governance and Financial Regulation:

Editor’s Note: The following post comes to us from Manuel Adelino of the Finance Area at Duke University, and Serdar Dinc of the Department of Finance and Economics at Rutgers University.

In our paper, Corporate Distress and Lobbying: Evidence from the Stimulus Act, forthcoming in the Journal of Financial Economics, we contribute to the long literature on corporate behavior in distress, as well as to studies of the consequences of financial distress. Using the financial crisis in 2008 as a negative shock to nonfinancial firms’ financial conditions, we document a novel fact on the relation between firms’ financial health and their lobbying activities. We compare the lobbying activities of firms before and after the onset of the crisis and find that firms with weak financial health—as measured by their CDS spread—lobby more. This result is robust to controlling for such firm-specific variables as size, profitability, and market-to-book ratio, all the firm characteristics that remain unchanged during the short window before and during the passage of the stimulus act, sector-wide time trends, and the adoption of different time windows for comparison in the difference-in-differences framework.

 

Interestingly, weaker firms decrease their capital investments in this period while increasing their spending for lobbying, which suggests a shift from productive activities to rent seeking, as discussed in Murphy, Shleifer, and Vishny (1991, 1993). Such shifts to rent seeking are costly to the economy, but much of those costs are incurred by the whole economy rather than by particular rent-seeking firms. Hence, estimates of financial distress costs in the corporate finance literature are unlikely to fully capture the costs of rent seeking attributable to the deteriorating financial health of firms.