UNIVERSITY OF COLOGNE

Firms make connections with political candidates through substantial monetary contributions to them and gain political advantages such as favorable regulations and special treatment that may translate into better financial performance. Despite the potential benefit of monetary contributions to political candidates, the increasing polarization of the political climate and recent anecdotal evidence suggests that a firm’s political connections may become a liability due to the potential for consumer backlash. Against this background, we examine the role of advertising investment in mitigating the risk of political connections. Accounting for the potential selection bias and endogeneity concern, results of our empirical models show that the political connections made by firms have a significant and positive effect on advertising spending. We also identify specific conditions under which the effect of political connections on advertising spending is heterogeneous and provide the nuanced implications.