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

Abstract

A growing body of literature concerning the political connections of either private-sector firms or states has gained much momentum in the last two decades. Despite the fast-growing interest in the research of political connections, 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, which provides another proof of the alleged disciplinary disconnect that has existed for a long time between public administration, economics, and defense-related research. 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) document that defense contractors earn excessive profits relative to their industry counterparts. This study extends Wang and San Miguel (2012) and examines whether defense contractor's political connections (as measured by the prior employment histories of the board directors) influence contractor's 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 regulatory redline.