The Benefits of a Relational Approach to Corporate Political Activity: Evidence from Political Contributions to Tax Policymakers

Abstract

ABSTRACT Empirical evidence linking campaign financing activity to future firm benefits is mixed. However, theory suggests that an important aspect of a successful political strategy is a multi-period investment in cultivating relationships with key policymakers (Snyder 1992). We examine a specific setting and investigate whether firms that invest in relationships with tax policymakers via campaign contributions accrue greater future tax benefits. We find that firms that pursue a more relational approach to corporate political activity have lower future cash and GAAP effective tax rates (ETRs) and less volatile future cash ETRs. Further, we provide evidence of an incremental effect of tax-specific lobbying for firms that develop stronger relationships with tax policymakers via PAC support. Thus, our study links tax-specific PAC support to tax-specific outcomes, providing an economic link for the observed contribution-return relation documented in Cooper, Gulen, and Ovtchinnikov (2010). Data Availability: All data are publicly available from sources as indicated in the text.