The effects of firm political contributions on earmarks and subsequent firm performance

With the reintroduction of hard earmarks in the United States, it is essential to understand the factors that drive the receipt of earmarks. Earmarks represent a significant source of revenue for many firms. We examine the relationship between political expenditures, federal earmarks, and subsequent firm performance. Using a sample of earmarks from appropriations bills, we demonstrate that firm-affiliated political action committee (PAC) contributions to legislators predict the size and number of earmarks directed to these companies. We also show that PAC contributions to a legislator increase the probability of the legislator writing an earmark benefiting the firm, with an average return of 1090%. Earmarks are associated with greater future profitability, but politically connected earmark recipients exhibit poorer financial performance. Our findings indicate a clear channel through which firms receive value from the US federal government. The Relationship between PAC Contributions and Earmarks. This graph shows the relationship between the natural log of total PAC contributions made by the firm-affiliated PAC and the natural log of total earmarks received by the firm. [Display omitted] •We examine the factors influencing firm receipt of “hard” earmarks.•PAC contributions to Congressmen and Senators positively influence earmark receipt.•We show specific PAC contributions to earmark sponsors influences receipt.•Firm performance relative to industry competitors increases after earmark receipt.•Politically connected firms underperform other recipients after earmark receipt.