Market reactions to non‐market strategy: Congressional testimony as an indicator of firm political influence

• Published date: 01 October 2019
• Author: Amy Ingram,Jason W. Ridge,Dinesh Hasija,Mirzokhidjon Abdurakhmonov
• Date: 01 October 2019
• DOI: http://doi.org/10.1002/smj.3038

RESEARCH ARTICLE

Market reactions to non-market strategy:

Congressional testimony as an indicator of firm

political influence

Jason W. Ridge

1

| Amy Ingram

2

| Mirzokhidjon Abdurakhmonov

1

|

Dinesh Hasija

1

1

Sam M. Walton College of Business,

University of Arkansas, Fayetteville,

Arkansas

2

Clemson University, Clemson, South

Carolina

Correspondence

Jason W. Ridge, Sam M. Walton College of

Business, University of Arkansas,

Fayetteville, AR 72701.

Email: ridge@uark.edu

Abstract

Research Summary:We argue that because influence in

the political arena can net benefits for firms, investors will

respond favorably to indications of firm political influ-

ence. We focus on testimony before Congress because it is

one of the most highly sought after and influential points

of governmental access. Our findings indicate that firms

reap positive abnormal returns surrounding Congressional

testimony and that investors respond more favorably to

aspects of testimony that indicate additional political influ-

ence (i.e., witness status, testimony length, and committee

jurisdiction). Further, we find regulatory risk strengthens

the effect of witness status and testimony length while

Congressional negativity strengthens the effect of witness

status. Taken together, our results suggest that investors

respond favorably to indications that firms have influence

in the political arena.

Managerial Summary:Our findings showcase that inves-

tors react positively to firm Congressional testimonies and

their attributes, such as the status of a firm representative,

the length of the testimony, and the committee industry

jurisdiction. Further, we also find that investors will

respond even more positively to these Congressional testi-

mony attributes when a firm is facing high regulatory risk

and when the Congressional representative's tone is nega-

tive. In general, our findings suggest that firms may gain

Received: 21 July 2017 Revised: 19 March 2019 Accepted: 22 March 2019 Published on: 10 May 2019

DOI: 10.1002/smj.3038

1644 © 2019 John Wiley & Sons, Ltd. Strat Mgmt J. 2019;40:1644–1667.wileyonlinelibrary.com/journal/smj

market returns through obtaining public access to Con-

gressional committees.

KEYWORDS

abnormal returns, congressional testimony, corporate political activity,

political influence, screening theory

1|INTRODUCTION

Corporate political activity (CPA) is increasingly viewed as an important component of firm strate-

gies (Hillman, Keim, & Schuler, 2004; Lux, Crook, & Woehr, 2011). Firms have responded to this

strategic imperative by dedicating significant resources toward the endeavor (Werner, 2017) and

have reaped benefits in the form of government contracts (Ridge, Ingram, & Hill, 2017), tax rates

(Adhikari, Derashid, & Zhang, 2006), and preferential access to financing (Claessens, Feijen, &

Laeven, 2008). In order to reap rewards for CPA, firms require access to public policy makers

(Werner, 2015). Congressional testimony is one of the most highly sought after, influential, and pub-

licly viewed points of governmental access for firms (Leyden, 1995; Nownes, 2006; Wright, 1990,

1996, 2002). Indeed, Congressional committees are the principal mechanism used by Congress to

acquire information and draft legislation (Hall & Wayman, 1990). These committees thus become

the “gatekeepers of policy”that wield the power to craft legislation and ultimately choose what legis-

lation will or will not go before the chamber (De Figueiredo, 2013:119).

In this role, committees conduct hearings to gather information from organizations about the pos-

sible impact proposed legislation may have on the environment, business, and society at large

(LaForge, 2010; Wright, 1996). For instance, companies like Amazon and eBay have been invited to

testify in front of Congress multiple times to discuss the potential impact an online sales tax will have

on their business, industry, and the community (Lamm, 2011). Through this information gathering

role, committee hearings have a large impact in shaping policy (Burstein & Hirsh, 2007; Maltzman,

1998), yet securing an invitation to testify in-person is difficult (Leyden, 1995; Wright, 1996). To

provide oral testimony, a witness must be selected by the committee, and this selection is typically

granted only to key players in the political arena (Wright, 1996) that invest significant resources,

spend substantial time establishing relationships with committee members, and are informed about

the topic (Leyden, 1995).

Because CPA is basically designed to obtain access to influential policy makers, and because

investors value CPA (Fisman, 2001; Werner, 2017), we draw from screening theory to argue that

investors will interpret a firm representative testifying before a Congressional committee as indica-

tive of political influence and thus respond positively. Screening theory suggests that when receivers

are unable to observe phenomena of interest, they focus on its associated observable indicators

(Gomulya & Mishina, 2017; Sanders & Boivie, 2004). Indeed, since most political activity occurs

behind closed doors and out of public view (Hillman et al., 2004; Jia, 2018), being invited to testify

in Congressional hearings is a key way for an external audience to determine whether an interest

group has been successful in leveraging its political influence (Leyden, 1995).

Further, to determine if investors' positive reactions to testimony before a Congressional commit-

tee are indeed due to expectations of a firm's political influence, we focus on the underlying mecha-

nisms of the testimony that may accentuate this positive investor reaction. For instance, the status of

RIDGE ET AL.1645