Guilty by Political Association: The Impact of Political Scandals on Connected Firms

Over the period 1992–2018, we investigate the economic impact of scandal-tainted congresspersons on politically connected firms. Following the first media report of a scandal, firms connected to the scandal-tainted congressperson experience a relative loss in market value. The loss manifests through both a reputational spillover and a reduced effectiveness of the congressperson in granting political favors to firms. Our findings indicate an undocumented cost of corporate political connections—the loss that occurs when a connected politician is caught up in a scandal.