The influence of director network in corporate lobbying companies

Abstract

Companies can gain both strategic and financial benefits from corporate lobbying and director networks. However, no clear consensus has emerged from the academic literature in regard to how director networks can influence corporate decisions relating to director compensation packages and company growth (such as capital structure decision) in lobbying companies. This study addresses these gaps in the existing literature and provides greater insight into the significance of director networks, along with lobbying networks, in corporate decision making (director compensation and capital structure) in U.S. lobbying companies. Specifically, the thesis attempts to address the following research questions: 1) What is the relationship between director networks and director compensation in U.S. lobbying companies? 2) How can director networks affect directors’ decisions about capital structure in U.S. lobbying companies? To test hypothesis 1 (see Chapter 5.2), I used 7,129 director-level yearly observations from 2005 to 2014 from 278 U.S. lobbying companies. From the critical empirical analysis, I conclude that the directors with large network connections managed to get an offer of higher compensation compared to directors with fewer network connections in U.S. lobbying companies. The results reveal that directors’ traditional networks along with lobbying networks enhance the quality of decisions taken by directors and better managerial decision-making benefits the company (Larcker et al., 2013). As a result, when a company performs well because of the above reasons, directors receive higher compensation because of their better performance (Goergen et al., 2019). The results of my study are similar to other research, where, however, there is no mention of lobbying networks (Renneboog and Zhao, 2011). I expand on the existing studies by focusing on the U.S. lobbying companies in the thesis. When directors are linked with lobbying, they create an additional network that allows them to collect information about the decisions the government will be taking in the near future (Unsal et al., 2016). This allows directors to better align their corporate decisions with government requirements. Thus, usually shareholders and the stakeholders are satisfied with the directors’ managing ability, which leads to higher compensation for the directors. To test the above argument, in the analysis I use an interaction term which consists of director network and corporate lobbying to determine director compensation in these companies. The results reveal that director networks and corporate lobbying complement each other in relation to director compensation in the U.S. lobbying companies, suggesting that both director networks and corporate lobbying are effective for directors to collect complementary information and thus improve corporate decision making. Empirical section 2 (see Chapter 5.3) answers the second research question. A sample size of 39,914 director-level observations from 607 U.S. lobbying companies between 2005 and 2015 was used to examine the relationship between director networks and capital structure decisions in U.S. lobbying companies. By combining agency theory, social capital theory, and the pecking order theory, two main variables (capital structure and director network) were constructed with different proxies. I find that directors with high network centrality prefer higher debt in capital structure decisions in lobbying companies. This is because directors with a high-quality network have improved access to unpublished information and are in a better situation to take corporate financing decision by using the information gathered from their network. Existing studies have reached similar conclusions (Huang and Shang, 2019). However, by considering the lobbying company sample, I contribute to the academic literature related to capital structure. The coefficient of the interaction terms (corporate lobbying and types of director network centrality) are statistically significant in the empirical analysis. Thus, it is evident that directors can use their traditional network in addition to lobbying networks to obtain valuable information and are able to focus on the growth aspects of the company that depend on debt-based capital structure decisions. The composite theoretical model and the empirical findings presented here add to the academic literature by expanding the research related to corporate lobbying, director networks, director compensation and capital structure. The results offer directors a practical understanding about the importance of director networks in lobbying companies and suggest that director networks can incentivise lobbying activities, helping directors to obtain higher compensation. In addition, director networks could also be an incentive for debt-based capital structure in lobbying companies.