Political Signaling via Equity Ownership: Impacts on Supplier Financial Performance

Abstract

This study offers a new application of signaling theory to better understand the role of equity linkages and political influence on buyer–supplier relationships (BSRs). We examine the signaling effects of a politician's personal equity investment in a buyer firm on the financial performance of the supplier firms located in the politician's constituency, that is, “constituent suppliers.” Our results show that constituent suppliers' financial performance increases with the home politician ownership of their principal buyers, consistent with home politicians' incentives to benefit their constituencies and gain the support of local voters through promoting supplier–buyer relationships. Interestingly, such positive signaling effects on the financial performances of constituent suppliers vary with interdependence relationships between the home politician, investee buyer, and constituent supplier. The positive performance effect is stronger when investee buyers have greater political engagement, when politician owners hold more powerful congressional positions, and when the economic condition of the politician's constituency is poorer. In contrast, the positive performance effect is attenuated when buyers have higher economic dependence and switching costs vis‐à‐vis their suppliers. Our mechanism analyses reveal that the likelihood of increased sales as well as lowered operating and sales support costs partially mediate the relationship between supplier financial performance and home politician ownership in buyers, representing investee buyers' munificence. The investee buyers are also more likely to select firms located in their politician shareholders' constituencies as new suppliers, another mechanism of promoting business relationships with constituent firms. We further find that buyers with politician shareholders from their suppliers' constituencies receive more valuable government contract awards, and smaller firms exhibit significant performance gains. A series of endogeneity checks based on exogenous shocks and alternative measures highlight the robustness of our results. Our findings suggest that politicians' stock ownership in buyer firms signals secondary stakeholder influence and information sharing that shapes BSRs, promoting profitable business relationships for constituent suppliers.