Political Ties across Country Borders

Abstract

This paper investigates the value to foreign firms of contributing to US political campaigns. Using a comprehensive database of US campaign contributions by employees of US subsidiaries of foreign firms, we find that foreign firms contributing to US political campaigns have higher profits than a country-industry-size matched sample of foreign firms that do not contribute. In particular, foreign firms facing greater information asymmetry have greater benefits from contributions. Exploiting the Bipartisan Campaign Reform Act (BCRA) as an exogenous shock to campaign contributions, we find that foreign contributing firms not only receive more government contracts than non-contributing foreign and domestic firms, but also benefit disproportionately more than domestic contributing firms. Our results highlight the limited effectiveness of campaign contribution laws and the cost to US firms of foreign political contributions.