See you in court? The (un)intended legal consequences of corporate political connections

Abstract

Research on corporate political connections has long focused on their strategic and financial outcomes. Yet, most of this research has avoided exploring the downstream risks associated with such connections, in particular, legal risks. The buffering nature of political connections, aimed at reducing sociopolitical uncertainty, as well as their potential to provide public policy benefits and protection, may cause politically connected firms to be more insular and less sensitive in their obligations and commitments to firm outsiders and thus be targeted for lawsuits. Exploring the S & P 1000 firms for 16 years and controlling for other aspects of political activity, across different analytical approaches, I find consistent evidence that corporate political connections are associated with lawsuits and associated with corporate-governance-related lawsuits. I further document that the monitoring and disciplining presence of equity blockholders moderates the association between political connections and lawsuits. The findings shed a novel light on the need to explore downstream legal risks, associated with politically connected firms, and the potential legal costs of political ties.