Corporate Political Activity and Free Riding under Market Uncertainty: An Investigation of TARP Funding

• Author: Lee Warren Brown,John A. De Leon,Abdul A. Rasheed
• DOI: http://doi.org/10.1111/basr.12165
• Published date: 01 March 2019
• Date: 01 March 2019

Business and Society Review124:1 115–143

© 2019 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by

Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford OX4 2DQ, U K. DOI: 10.1111/basr.12165

Corporate Political Activity

and Free Riding under Market

Uncertainty: An Investigation

of TARP Funding

LEE WARREN BROWN, JOHN A. DE LEON, and

ABDUL A. RASHEED

ABSTRACT

Given that the benefits of Corporate Political Activity

(CPA) are usually granted in the form of favorable indus-

try regulation that benefits all industry participants

rather than a single firm, small politically inactive firms

are often able to take advantage of the benefits from CPA

without investing in them. We argue that the free-riding

problem is context specific. Situations of extreme uncer-

tainty create institutional voids that enable individual

firms to more fully appropriate the returns from their

CPA. In this paper, we examine the influence that CPA

had on the U.S. government’s disbursements of TARP

funding in 2008. We find that politically active firms were

able to avoid the free-rider problem by obtaining more

Lee Warren Brown is an assistant professor of Management, Texas Woman’s University,

Denton, TX. E-mail: lbrown37@mail.twu.edu. John A. De Leon is an assistant professor

of Management, Tarleton State University, Stephenville, TX. E-mail: jdeleon@tarleton.edu.

Abdul A. Rasheed is an Eunice and James L. West Distinguished professor, University of

Texas at Arl ington, Arling ton, TX. E-mail: abdu l@uta.edu.

116 BUSINESS AND SOCIETY REVIEW

instances of TARP funding when compared to firms that

were not politically active. In addition to being more likely

to receive TARP funds, politically active firms received

larger amounts of TARP funding than those firms who

were not politically active.

The Corporate Political Activity (CPA) literature has long

studied the interaction between organizations and govern-

ment. Although the potential of non-market activities to re-

sult in competitive advantage was underestimated for a long time,

researchers have been paying increasing attention to it in recent

years (Hillman et al. 2004; Lawton et al. 2013; Liedong et al. 2015).

A theoretical puzzle that CPA researchers have encountered is the

free-rider problem. A free-rider problem occurs when firms take

advantage of benefits provided by the actions of other firms with-

out incurring the costs of those actions. Much of the CPA efforts

by firms are aimed at obtaining favorable legislation or regulatory

changes. When CPA efforts by individual firms, especially large

firms, are successful and firms obtain favorable legislation, com-

peting firms within the same industry are able to take advantage

of the favorable legislation although they have not expended any

resources.

Why would large firms expend significant resources to an activ-

ity when they cannot fully capture the benefits from it? Not only

are they unable to fully capture the benefits of their CPA, but they

also have to share the benefits with their rivals. In contrast, it can

be argued that firms would engage in CPA despite the fact that

they have to share the benefits with other industry players be-

cause their own gains are not diminished by the gains of others as

this is not a zero-sum game. The counter argument would be that

managers would be reluctant to expend resources unilatera lly and

share the gains with others. That is, despite the theoretical poten-

tial for free riding, the gainsharing is not equal and the firms who

expend resources on CPA do so because they are indeed able to

appropriate for themselves most of the gains from such expendi-

tures. Further, the ability of firms to appropriate benefits may be

context specific. That is, there may be some contexts that are more

conducive to value appropriation than others.

Our primary research objective in this paper is to attempt a res-

olution of the free-rider paradox relating to CPA. In this paper, we