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

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

Business and Society Review 124:1 115–143

© 2019 W. Michael Hoffman Center for Busi ness Ethics at Bentley Univer sity. Published by

Wiley Period icals, Inc., 350 M ain Street , Malden, MA 0 2148, USA, and 9600 Ga rsington

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. RASH EED

ABSTR ACT

Given that the benefits of Corporate Politica l Activity

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

try regulation that benefits all i ndustry par ticipants

rather than a single firm, sma ll politically inactive fir ms

are often able to take advantage of the benefits from CPA

without investing in t hem. We argue that the free-ridi ng

problem is context specific. Situations of extreme u ncer-

tainty create i nstitutional voids that enable indiv idual

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 20 08. We find that political ly active firms were

able to avoid the free-rider problem by obtaining more

Lee Warren Br own is an as sistant professor o f Management, Te xas Woman’s Universit y,

Denton, TX. E-m ail: lbrow n37@mail.tw u.edu. John A. De Leon i s an assista nt professor

of Management, Ta rleton State Univ ersity, Stephenvil le, TX. E-ma il: jdeleon@ta rleton.edu.

Abdul A. Ra sheed is an Eun ice and James L . West Distingu ished professor, Univers ity of

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

116 BUSINESS AND SOCIETY REVIEW

instances of TAR P funding when compared to firms t hat

were not politically active. In addition to bei ng more likely

to receive TARP f unds, politically active firms received

larger amounts of TAR P funding t han those fi rms who

were not politically active.

The Corporate Political Activ ity (CPA) literature has long

studied the interaction between organi zations and govern-

ment. Although the potential of non-market activ ities to re-

sult in competitive advantage was u nderestimated for a long time,

researchers have been payin g increasing attention to it in recent

years (Hil lman et al. 200 4; 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 t ake

advantage of benefits provided by the actions of other firms wit h-

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

by firms a re aimed at obtain ing favorable legislation or regulatory

changes. When CPA efforts by indiv idual firms, especially large

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

peting fir ms withi n the same industr y are able to take advantage

of the favorable legislation although they have not expended any

resource s.

Why would large firms expend sign ificant resources to a n activ-

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

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

also have to share the benefits w ith their r ivals. In contrast, it can

be argued that fi rms would engage in CPA despite the fact that

they have to share the benefits w ith other industry players be-

cause their own gai ns are not dimin ished by the gains of others as

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

managers would be reluctant to ex pend resources unilatera lly and

share the gains w ith others. That is, despite the theoretica l poten-

tial for free riding, the gainsha ring is not equal a nd 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. Furt her, 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