Journal of Law and Economics

Guilty by Political Association: The Impact of Political Scandals on Connected Firms

By: April Knill, Baixiao Liu, John J. McConnell, and Cayman Seagraves

Journal of Law and Economics, 2024, 67(4), pp. 841-877

Abstract

Over the period 1992–2018, we investigate the economic impact of scandal-tainted congresspersons on politically connected firms. Following the first media report of a scandal, firms connected to the scandal-tainted congressperson experience a relative loss in market value. The loss manifests through both a reputational spillover and a reduced effectiveness of the congressperson in granting political favors to firms. Our findings indicate an undocumented cost of corporate political connections—the loss that occurs when a connected politician is caught up in a scandal.

Keywords

Political Connections Corporate Finance Scandals Firm Value

White Paper

Executive Summary

This white paper distills our findings from “Guilty by Political Association: The Impact of Political Scandals on Connected Firms,” where we analyze how congressional misconduct affects firms whose political action committees (PACs) have contributed to implicated legislators. Examining data from 1992 to 2018, our study reveals that when a connected congressperson becomes entangled in scandal, affiliated firms suffer substantial market‐value declines and reputational damage. In total, a single scandal connection costs a firm roughly $400 million in value, with additional losses when the politician remains in office.