Political Capital: An Analysis of Congress Voting on the Financial Regulations

• Author: Xiaoting Hao,Yong‐Cheol Kim,Yuree Lim
• Published date: 01 December 2019
• DOI: http://doi.org/10.1111/ajfs.12282
• Date: 01 December 2019

Political Capital: An Analysis of Congress

Voting on the Financial Regulations

Xiaoting Hao

Lubar School of Business, University of Wisconsin-Milwaukee, United States

Yong-Cheol Kim*

Lubar School of Business, University of Wisconsin-Milwaukee, United States

Yuree Lim

College of Business, University of Wisconsin-La Crosse, United States

Received 19 January 2019; Accepted 12 September 2019

Abstract

We find that members of the House of Representatives who vote for deregulation are more

likely to be employed in the private sector after leaving Congress than those who do not vote

for deregulation. An analysis of voting behavior in a major financial regulation—the Gramm-

Leach-Bliley Act of 1999—shows that representatives use voting to enhance their careers. The

results are consistent with politicians’ public rent-seeking and show that political capital is as

valuable for politicians as it is for companies.

Keywords Political capital; Public rent-seeking; Financial regulations

JEL Classification: G28, G38, K22

1. Introduction

A large body of literature in political economy argues that politicians vote according

to self-interest. Certainly, one of the primary goals for politicians is to be re-elected

(Mian et al., 2010; Moskowitz, 2010). Mian et al. (2010) show that legislators

increase the probability of re-election by protecting constituents’ economic inte rests

(e.g., the Foreclosure Prevention Act) and supporting special interests (e.g., the

Emergency Economic Stabilization Act) to ensure higher campaign contributions,

in this case from the finance industry. Moskowitz (2010) analyzes the introduction

of US state usury laws in the nineteenth century and shows that they coincide with

other economic and political policies favoring wealthy political incumbents, particu-

larly if they have significant voting power. In this study, we reveal the career

*Corresponding author: Lubar School of Business, University of Wisconsin-Milwaukee, PO

Box 742, Milwaukee, WI 53201-0742, United States. Tel: +1-414-229-4997, Fax: +1-414-229-

6957, email: ykim@uwm.edu.

Asia-Pacific Journal of Financial Studies (2019) 48, 869–892 doi:10.1111/ajfs.12282

©2019 Korean Securities Association 869

incentives of legislators by analyzing the voting records of House representatives

concerning the financial regulation of the Gramm-Leach-Bliley Act (GLBA) of 1999.

Another way politicians benefit from voting is to enhance their employability

after leaving Congress (Kane, 1990). Kane (1990) argues that officials in the S&L

Resolution Trust Corporation (RTC) protected their reputations for post-govern-

ment employability. The prevalent phenomenon of the “revolving door”—the

movement of politicians from public to private sector jobs, and vice versa, especially

among regulators, legislators, and top management—in the financial services indus-

try exposes incentives for politicians to look to their future careers. The following is

an example of the “revolving door.”

Former Texas Sen. Phil Gramm, who joined UBS in 2003, has retired as vice

chairman of the firm’s investment-bank division but will take on a role as a consul-

tant for the bank. As vice chairman of the investment bank, he served as a senior

advisor to investment-banking clients and worked with governments around the

world on behalf of UBS. Previously, Mr. Gramm served 6 years in the House of

Representatives and 18 years in the U.S. Senate. Phil Gramm served as a congress-

man for both the Democratic and Republican parties, but most recently as a

Republican (Tadena, 2012).

A large portion of the literature evaluates the revolving door effect of credit rat-

ing analysts (Cornaggia et al., 2016), SEC lawyers (DeHaan et al., 2015), financial

regulators from the Federal Reserve, the SEC, FINRA, the CFTC, the OCC, and the

FDIC (Shive and Forster, 2017), and sell-side analysts (Lourie, 2018). Our focus is

on elected officials who may similarly engage in rent-seeking in favor of their

prospective employers.

It is important to understand the revolving door effect of elected officials since

they often influence corporate decisions. Companies affiliated with financial institu-

tions change their actions based on the needs of elected officials. For example,

Agarwal et al. (2018) find that when the US House of Representatives Financial Ser-

vices Committee considered important banking reforms in 2009–2010, the banks

strategically delayed foreclosure starts on delinquent mortgages in the districts of

committee members in spite of the huge costs of delay. This was because such

delays allowed banks to obtain favorable legislative outcomes, which may have

helped politicians sympathetic to the banks to get re-elected.

Not surprisingly, political capital and connections benefit the connected parties

—firms, on the one hand, and government officials and legislators on the other. In

addition to physical, human, and other capital, political capital is an important fac-

tor that affects firm investment, financial decisions, and firm value. Both the firm

and the entity holding political power have incentives to use their leverage to

enhance their own self-interest. Firms invest in political capital and establish con-

nections to harvest the benefits of political connections, for example, gove rnment

bailouts for companies in financial distress (Duchin and Sosyura (2012), Faccio

et al. (2006)). Kostovetsky (2015) examines the value of political connections of

financial firms and finds that poor performance and high leverage of financial firms

X. Hao et al.

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