Three Essays on Political Economy in Finance

Abstract

This thesis comprises three empirical studies at the intersection of political economy and corporate finance, exploring how political access, public demand, and trade policy shape corporate behavior and governance. The first study investigates the strategic value of firms' political campaign contributions through director appointments. Former U.S. Congress members are three times more likely to join the boards of their campaign contributors, especially when they are well-positioned to benefit the firm. Recipient legislators receive higher board compensation, exhibit greater engagement, and help firms obtain more government contracts, face less regulatory scrutiny, and achieve stronger growth.

The second study examines how persistent demand shocks influence CEO compensation and firm outcomes. Using Census-based increases in U.S. government spending, we find that contractors facing greater procurement opportunities adopt more convex pay structures to align managerial incentives with shareholder interests. These effects are strongest in well-governed firms and reverse during demand contractions. Enhanced risk-taking incentives promote investment and performance improvements.

The third study analyzes 25 major trade reforms across 17 countries since 1990 to assess the valuation impact of tariff cuts. Firm value increases following import tariff reductions, particularly in emerging markets and countries with strong competition laws. The effect operates through cost efficiency from cheaper imported inputs and stronger managerial discipline, evidenced by heightened CEO turnover–performance and pay–performance sensitivities.