Political Connections of the Boards of Directors and Defense Contractors Excessive Profits

Abstract

Despite the fast-growing interest in the research of political connections of either private-sector firms or states, most of the papers belong to the economics or public administration fields. There are few studies, if any, that look into the role of firms political connections in the defense acquisition area. This paper makes an effort to bridge this gap by investigating the impact of political connections on the excessive profitability of defense contractors. Wang and San Miguel (2012) documented that defense contractors earn excessive profits relative to their industry counterparts. This study extends Wang and San Miguel (2012) and examines whether defense contractors political connections (as measured by the prior employment histories of the board directors) influence contractors excessive profitability. We find that, in contrast to the prediction of corruption hypothesis, the excessive profits are less (more) pronounced for those contractors with politically connected (non-connected) boards. This casts doubt on the preconceived notion that those politically connected board members are corrupt in nature; rather, our findings suggest that they may use their experience to serve a benevolent role to the public in keeping defense contractors from opportunistic profit-seeking behaviors that could reach or even cross the federal government's regulatory redline.