How Firms Use Lobbying to Reduce Post-Election Policy Risk

Why This Research Matters:

Elections can trigger large shifts in regulation and public spending, creating policy risk for firms. Kristy Buzard, Nathan Canen, and Sebastian Saiegh investigate whether and how corporate lobbying mitigates that risk, shedding light on the political strategies firms choose when facing uncertain post-election policy environments.

How Policy Risk Is Measured:

The authors create a new firm-level measure of exposure to policy uncertainty based on investors’ expectations of variability in stock returns in the aftermath of the 2020 U.S. presidential election. By using financial-market signals rather than only surveys or textual measures, the study captures how capital markets perceive firm-specific vulnerability to election-driven policy change.

Data and Empirical Strategy:

• A newly assembled dataset links firm lobbying activity to market-based measures of election-related return variability after the 2020 election.
• The analysis tests whether firms that lobby experience smaller increases in market-implied policy risk, controlling for selection into lobbying and for differences across sectors.
• Identification strategies and robustness checks address confounding factors such as sectoral heterogeneity and differential likelihood that more exposed firms choose to lobby.

Key Findings:

• Firms that engage in lobbying face lower investor-expected return variability after the election, consistent with lobbying reducing firm-level policy uncertainty.
• This relationship persists after accounting for selection into lobbying and across industrial sectors, indicating a substantive effect rather than a compositional artifact.

A Behavioral-Structural Model of Lobbying:

Buzard, Canen, and Saiegh build and estimate a model of heterogeneous firms that choose lobbying endogenously. The model shows that: lobbying is costly; the distribution of returns to lobbying is highly skewed (a few firms gain large benefits); and marginal returns to additional lobbying decline rapidly. These features explain why only a minority of firms invest in lobbying even though lobbying, on average, dampens policy risk.

What This Means for Policy and Research:

The study links financial-market signals to political activity, demonstrating that lobbying can be an effective, but selectively adopted, tool for firms to mitigate election-driven policy uncertainty. The combination of market-based measurement and a calibrated model advances understanding of corporate political behavior and its limits when shaping policy outcomes.