Incorporated in Westminster: Channels and Returns to Political Connection in the United Kingdom

Abstract

The connection between politicians and firms remains a controversial issue. This reflects a tension between the potential capture of politicians and the ability to attract high productivity individuals with business experience to representative politics. We examine this issue focusing on the firm value effect of a change in parliamentary regulation in the U.K. that allowed active members of parliament (MPs) with corporate affiliations to participate in parliamentary debates on issues related to their corporate interests. Using this as a source of exogenous variation in the political value of these MPs to firms, we find that firms with political connections to MPs experienced positive abnormal returns around the event. We provide a range of additional evidence that suggests that these returns reflect an expectation of increased influence. Firms with non-MP political connections had no change in firm value in the same time-window. Politically connected firms reduce political donations after the change in regulation. Together our results indicate that political influence is a substantial component of the financial returns from political connections, even in countries with low corruption and well-developed institutions. These connections are unlikely to be socially desirable.