Political Influence and the Renegotiation of Government Contracts. (17th August 2020)

• Record Type: Journal Article
• Authors: Brogaard, Jonathan; Denes, Matthew; Duchin, Ran
• Editors: Denis, David
• Is Part Of: Review of financial studies. Volume 34:Number 6(2021)
• Page Start: 3095
• Page End: 3137
• Publication Date: 2020-08-17
• Subjects: D72 -- H57 -- P16; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhaa093
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: This paper provides novel evidence that corporate political influence operates through renegotiations of existing government contracts. Using detailed data on contractual terms and renegotiations around sudden deaths and resignations of local politicians, the estimates show that politically connected firms initially bid low and successfully renegotiate contract amounts, deadlines, and incentives. The effects hold across different industries and contract types, enhance firm value, and persist around the exogenous increase in contract supply due to the American Recovery and Reinvestment Act. Overall, this paper establishes an unexplored link between political influence, ex post renegotiations, and ex ante bidding of government contracts.