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Access to Obama White House Brought Companies Better Stock Performance, Study Shows

In "All the President’s Friends: Political Access and Firm Value," finance professors outline three ways government meetings may be valuable to companies.

Richard B. Levine/NewscomRichard B. Levine/NewscomCompanies whose executives visited the White House during the Obama administration had their stock prices rise more than normal after the meetings, but underperformed after Donald Trump won the election, a new paper by researchers at the University of Illinois finds.

The finance professors, Jeffrey Brown and Jiekun Huang, published their findings in a working paper issued by the National Bureau of Economic Research and titled "All the President's Friends: Political Access and Firm Value."

"Following meetings with federal government officials, firms receive more government contracts and are more likely to receive regulatory relief," the professors write. "Firms with access to the Obama administration experience significantly lower stock returns following the release of the [2016] election results than otherwise similar firms. Overall, our results provide evidence suggesting that political access is of significant value to corporations."

The professors outlined three ways that government meetings may be valuable to companies. "Government officials may influence the allocation of lucrative government contracts towards firms whose executives have interacted with them," Brown and Huang write. Officials or politicians may also "provide more regulatory relief to companies that have access to the politicians." Finally, "access to politicians may enable companies to gain an informational advantage about government policies and actions and help resolve political uncertainty."

The scholars used White House visitor logs to identify 2,286 meetings between White House officials and corporate executives between January 2009 and December 2015.

"Consistent with the notion that campaign contributions 'buy' access, we find that firms that contributed more to Obama's presidential election campaigns are more likely to have access to the White House. We also find that firms that spend more on lobbying, firms that receive more government contracts, larger firms, and firms with a greater market share are more likely to have access to influential federal officials," they write.

The professors even compared companies that went ahead with the meetings and companies that scheduled meetings that got canceled. The canceled meetings had no significant effect on the stock price, but the meetings that actually took place produced what the authors call "significant positive cumulative abnormal returns."

They found that "the stocks of firms with access to the Obama administration underperform the stocks of otherwise similar firms by about 80 basis points in the three days immediately following the election."

The economists write that there are two different ways to view these outcomes. At worst, "gaining access to politicians may enable firms to gain undue influence over elected officials and extract political favors… Under such a view, political access facilitates quid-pro-quo exchanges between firms and elected officials in which policy favors are exchanged for private gains to the politicians." Senators Bernie Sanders and Elizabeth Warren suggest this when they talk about how the system is "rigged"; Donald Trump was getting at it when he accused Hillary Clinton of being "totally owned by Wall Street."

A more benign explanation is that, as the authors put it, "political access may enable firms to provide policy-relevant information, which in turn helps elected officials to make more informed decisions on policies that affect the firms."

The authors warn that more research is needed to figure out which of these two dynamics best explains the correlation between stock-market results and political access. Perhaps it is some combination of the two.

One common response to the "undue influence" problem is to propose restricting political contributions, instead using taxpayer money to finance campaigns. That collides with the First Amendment freedoms of speech, press, assembly, and petition.

A better response might be a government that spends less and regulates less. As a practical matter, it's nearly impossible to guarantee all companies equal access to government decision-makers. But if government decisions were less important, our corporate executives might decide to spend less time and money trying to influence Washington, and more time on other ways to serve shareholders and customers.

Photo Credit: Richard B. Levine/Newscom

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  • Fist of Etiquette||

    It's the sole reason why they now pay him $400,000 per.

  • Uncle Jay||

    RE: Access to Obama White House Brought Companies Better Stock Performance, Study Shows
    In "All the President's Friends: Political Access and Firm Value," finance professors outline three ways government meetings may be valuable to companies.
    Ira Stoll | May 1, 2017

    Yup!
    Studies show cronyism definitely increases a company's value.

  • Brandybuck||

    The greatest myth told by Wall Street is that stock price equates to a company's value. Not true. Stock prices are so divorced from a company's value it's not even funny. There used to be a correlation, but no longer. Most mainstream investment firms no longer chase stock prices, they look for dividends. Income over gambling, in other words.

    Sure you can make billions betting the market, but you can still make millions on boring old stocks that never go anywhere but still provide income. I don't give a shit what a fund did in the last five months, I want to know how it did for the past twenty years.

    Obama didn't affect company valuations. He only affected the ephemeral stock prices for ephemeral companies.

  • The Last American Hero||

    I feel ya, but if a company is more likely to get a fat contract because they came and kissed the King's ring, that will impact their valuation since that fat contract is going to boost revenue and cash flow and probably income.

  • Principal Spittle||

    Who is kissing who's ring here?
    The author fails to point out what the source material blatantly attempts to cover as benign, all "three ways" are cronyism that take place simultaneously and all (certainly more than 3) are market disruptions with costs but not benefits. I don't believe there is a net increase of investment activity in an environment of increasing regulatory action but rather a shift towards companies viewed as "more safe" by virtue of their embeddedness within the corrupt apparatus. Simultaneously companies and even entire sectors are damaged by the mere appearance of disfavor. That is as close as l can get to calling what they do behind closed doors a virtue.
    It is also completely consistent for companies invested in "firm value" from soft morals to suffer slightly when the organization is handed over to a party/president who departs strongly from the previous administration. That is as close as l am going to get to complimenting Trump, reduction of regulation is the reduction of cronyism.

  • Juice||

    The greatest myth told by Wall Street is that stock price equates to a company's value. Not true. Stock prices are so divorced from a company's value it's not even funny. There used to be a correlation, but no longer.

    So true. Look at TSLA, NFLX, and many others. Their stock price has nothing, and I mean nothing, to do with their earnings. Some people will defend it and say that it has to do with future earnings. Uh, ok, maybe the next 100 years of potential earnings are already priced in, so that means we shouldn't buy them right? Well, TSLA, for instance, is at all time highs and on a tear with no top in sight. It's $320 something per share when it should be more like $40, maybe $70-80 if you want to make it a bubble stock. But what do you do? You fucking buy because it's probably going to $400 or $500 for no good reason except for the fanatics that keep buying it regardless. And that's why it is where it is now. Every reason for a decline in stock price doesn't matter.

  • creech||

    So you are short on TSLA right?

  • ||

    Cronies gonna crony.

  • BYODB||

    This seems like the perfect article to share amongst my more progressive and liberal friends. Sure, they believe this stuff when it comes to Trump but for some reason they refuse to see it for the Democrats no matter how rich they become while in office.

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