The role of combining CPA tactics and issue diversification on the CPA-CFP relationship in highly regulated industries

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The role of combining CPA tactics and

issue diversification on the CPA-CFP

relationship in highly regulated

industries

Student: Pavlos Xanthopoulos / Student Number: 11408928 MSc. Business Administration, Strategy track

University of Amsterdam, Faculty of Economics and Business

Supervisor: mw. dr. P. (Pushpika) Vishwanathan

Assistant Professor at the Amsterdam Business School, University of Amsterdam.

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Statement of originality

Pavlos Xanthopoulos has written this master thesis and hereby states to take full responsibility for the contents of this document. The information presented in this document is original and no sources, apart from those mentioned by references, have been used in creating it. Furthermore, it must be announced that the Faculty of Economics and Business is solely responsible for the supervisions of the work and not for the contents.

Acknowledgement

I would like to thank my supervisor, assistant professor Pushpika Vishwanathan for the constant and patient guidance, encouragement, and advice she has provided during this thesis process. Without her support this work would not have been possible. Therefore, I am truly grateful.

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Abstract

This study incorporates the resource dependency theory and investigates the main relationship between CPA and CFP in regulated industries. Furthermore, different combinations of CPA tactics are being considered. Reasoning from both the exchange theory and resource dependency theory, both PAC contributions and revolving doors are considered as moderating variables positively influencing the CPA – CFP relationship in regulated industries. The last research area consists of the firm’s degree of issue diversification. Here, nonmarket strategy is used to predict the moderating effect of issue diversification on the CPA – CFP link in regulated industries. The results show a non-significant effect in all of the hypotheses. This means that a firm’s CPA was not found to be a predictor of CFP, and that the moderating effect did not hold any significant effects, on the CPA – CFP relationship in regulated industries. Possible explanations for this non-significant effect are the uncertain context of CPA, the fierce political competition firms face, and an ineffective integration of the strategies. Besides that, since issue diversification was newly introduced in this field of research, conceptualization and measurement processes can be refined. Finally, future research could incorporate new possibilities in combining the existing forms of CPA and issue diversification.

Key words: Corporate Political Activity; Corporate Financial Performance; Lobbying activity; PAC contributions; Revolving doors; Issue diversification; CPA – CFP relationship; combining CPA tactics;

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1. Introduction

Over the past decade, nonmarket expenditures in the US are at high levels. To be exact, lobbying expenditures grew from $1.45 billion in 1998 to $3.12 billion in 2016 (Center for Responsive Politics, 2017). Furthermore, also PAC contributions increased from $519.1 million in 1998 to $2.2 billion in 2016 (Center for Responsive Politics, 2017). Given these figures, it can be assumed that expenditures in the ‘nonmarket’ environment play a huge role in determining the business environment.

A nonmarket strategy refers to a firm’s efforts to improve its financial performance by managing the institutional and/or societal context of economic competition (Baron, 1995; Lux, et al., 2011; Mellahi et al., 2016). Examples of nonmarket strategies are Corporate Social Responsibility (CSR) and Corporate Political Activity (Mellahi et al., 2016; Zhang et al., 2016; Lux et al., 2011).

This study will solely focus on a firm’s Corporate Political Activity (henceforth, CPA), which can be defined as the: ‘corporate attempts to manage and shape political institutions and/or influence political actors in ways favorable to the firm’ (Hillman et al., 2004, p. 838). So, firms participate in the political process to seek specific forms and outcomes of public policy that could favor the firm’s financial performance (CFP) (Hillman & Hitt, 1999; Hadani & Schuler, 2013). Despite the fact that several studies show that the CPA – CFP relationship tends to be positively related (Mathur et al., 2013; Lux et al., 2011; Hillman et al., 2004), others suggest there exists a negative relationship between CPA and a firm’s performance (Mellahi et al., 2016; Aggarwal et al., 2012; Hadani & Schuler, 2013).

A factor that explains these varying results is industry regulations. Namely, firms in regulated industries tend to show a positive effect between the CPA – CFP

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relationship, while in general CPA may actually harm some aspects of financial performance (Hadani & Schuler, 2013). Also, other studies emphasize the importance of a firm’s regulatory-political environment (Bonardi et al., 2006; Hillman, 2005; Getz, 1997). Following this line of literature, also this study will build further on recent studies incorporating the RDT perspective (Hadani & Schuler, 2013; Hillman et al., 2009). Hereby, focus will be laid upon firms using CPA in regulated industries. Then, as research agendas have stressed the importance of using multiple CPA tactics when influencing the public policy-making process (Schuler et al., 2002; Lord, 2000; Figueirdo & Tiller, 2001; Hillman & Hitt, 1999), further understanding of its effect on firm performance would be of significant value. Interestingly, many studies have shown that firms have huge incentives to combine different forms of CPA (Schuler et al., 2002; Hadani & Schuler, 2013). Therefore, reasoning from both RDT and exchange theory, this research will investigate the possible moderating effects of campaign contributions (PAC) and revolving doors, on the CPA – CFP relationship in regulated industries. Here, current literature will be enhanced, reasoning that the combination of different CPA tactics may lead to an increase in firm performance. In doing so, the findings of Schuler et al. (2002) are taken into account and will be tested for the firm’s CFP. In turn, this could contribute to RDT and exchange theory, by showing that combining tactics could possibly mitigate the relative high uncertainty and dependence levels in regulated industries (Hillman, 2005).

At last, this study will consider the firm’s issue areas lobbied on. This relatively new field of research has not received as much attention as the other forms of CPA, but may still hold interesting effects on the CPA – CFP relationship. For example, firms may choose to keep their lobbying strategy relatively focused, while other firms may choose to lobby on a diversified range of issue areas. This study

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conceptualizes this difference in issue areas lobbied on, as the firm’s degree of issue diversification. In order to predict how issue diversification could influence the existing relationship between CPA and CFP various theories are being connected.

First, the Resource-Based View (RBV) will be used in order to understand why firms engage in diversification strategies. Then, since this literature is mainly focused on product-market diversification and CPA happens in a nonmarket environment, nonmarket strategies will be discussed (Baron, 1995). It is expected that issue diversification will provide novel insights about its effect on the CPA – CFP relationship. In turn, firms could use these insights to improve their CPA policy when influencing the public policy-making process

In sum, this study will build further on RDT and exchange theory developing a comprehensive framework in determining if the combined CPA tactics have an effect on the CPA – CFP relationship in regulated industries. Besides that, this study sheds light on a new research area of CPA, considering the firm’s degree of issue diversification as a potential form of CPA. This will bring more understanding of the possible effects that could weaken or strengthen a firm’s performance in regulated industries. Hereby, not only the existing CPA tactics will be taken into consideration, but also a new concept (i.e. issue diversification) will be examined. In conclusion, this study will answer the following research question:

What is the effect of combining the CPA tactics: lobbying expenditures, PAC contributions, revolving doors, and issue diversification, on the CPA – CFP relationship in regulated industries?

The objective of this study is to extend current literature by testing the political and financial performance of Fortune 500 companies in the US. Data was gathered using

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Compustat, Fortune 500 website, SEC filings, and the Center for Responsive Politics. The results show a non-significant effect in all four hypotheses.

The organization of this article is as follows. First, an explanation of the central concepts in this research will be given. Here, existing CPA literature will be discussed and a brief overview of resource dependency theory will be given. This provides that basis for the first hypothesis. Then, the different CPA tactics and exchange theory are explained. This leads to the formulation of hypothesis 2 and 3. Then, diversification literature, the resource-based view and nonmarket strategy will be examined, which will eventually lead to hypothesis 4. Next, this research’s methodology section is offered. Here, also an overview of the research design is given. Subsequently, the results chapter is provided. After that, the discussion and conclusion parts will be presented. Here, the different findings are discussed and recommendations for future research will be cited.

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2 Literature and hypotheses formulation

In this section, the main literature domains that inform the scope of this study will be presented. Then, based on the reviewed literature and theories, arguments for four hypotheses will be constructed.

2.1 CPA

Corporate Political Activity (CPA) is considered a nonmarket strategy, whereby it refers to a firm’s actions to influence the political arena or to manage political entities (Lux et al., 2011) in ways favorable to the firm (Hillman et al., 2004). According to North (1990) firms operate in the political market to obtain and maintain economic advantages. In addition, other studies suggest that firms operate in the societal and institutional context of economic competitions to shape its market environment (Baron, 1995; Mellahi et al., 2015).

In general CPA is often conceptualized as an investment decision in order to generate higher returns (Lux et al., 2011). According to Hillman et al. (2004) a firm’s ability to influence the public policy is closely intertwined with improving its performance. Here, the explicit assumption is, that CPA helps firms to improve their financial bottom line (Hillman and Hitt, 1999; Hadani & Schuler, 2013). However, do firms truly achieve higher financial returns when they engage in CPA? Empirical evidence on the relationship between CPA and firm performance (henceforth, CFP) seem to be mixed (Hillman & Hitt, 1999; Hillman et al., 2004; Lux et al., 2011; Mellahi et al., 2015; Hadani & Schuler, 2013). Lux et al. (2011) for example show the CPA-CFP relationship is positively related, while Hadani and Schuler (2013) advocate there is a negative relationship.

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Particularly, mixed empirical evidence occurs when looking at the different industries firms operate in. Bonardi et al. (2006) advocate that the CPA-CFP relationship is positively related in the electric utility industry (Russo, 1992), while other studies show that there exists a negative relationship between CPA and firm performance (Hadani & Schuler, 2013; Cho et al., 2006). According to Cho et al. (2006) the varying CPA-CFP outcomes are due to the different political/institutional fields firms operate in. A factor that explains these varying outcomes firms operating in different industries is government regulation (Hadani & Schuler, 2013; Hillman & Hitt, 1999; Getz, 1997).

2.2 Industry Regulations

In a wide range of industries, firms are regulated by government agencies. These agencies establish, monitor, and implement administrative rules, such as entry decisions, product-standards and worker safety rules (Holburn & Vanden Bergh, 2008). Government agencies and regulators can be relatively friendly or hostile towards firms. Friendly actions are the actions closely related to the firm’s interests and hostile actions are the ones far from the firm’s interest (Holburn & Vanden Bergh, 2008). Industries that are highly regulated can be seen as hostile regulatory environments, in which it is the ability of the firm to manage its relationships with regulatory agencies (Holburn & Vanden Bergh, 2008). Firms that receive hostile regulatory actions, therefore attempt to seek support of the specific regulatory agency for a more favorable ruling (Holburn & Vanden Bergh, 2008). Consequently, CPA may then serve to buffer the firms from these compulsory limitations and in turn may lead to superior CFP (Hadani & Schuler, 2013; Cho et al., 2006).

Furthermore, from a Resource Dependency Theory (RDT) point of view, it is very interesting to look at the role industry regulations play in a business’s

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environment (Getz, 1997). Since, industry regulations can be defined as the limitations governments place on firm’s behaviors (Cho et al., 2006), RDT states that in regulated industries increased dependence exists because government imposes higher levels of constraints on firms’ behavior and effectiveness (Getz, 1997; Hadani & Schuler, 2013). In turn, this dependence is undesirable because it reduces the range of choices the dependent organization (i.e. the firm) has in any given situation (Getz, 1997). Then, firms that perceive higher levels of dependence respond to regulations by engaging in CPA, which may be intended to thwart or shape government regulations in ways favorable to the firm (Getz, 1997).

Additionally, a firm’s dependence on government may also create risks and uncertainties, which in turn may affect a firm’s performance (Hillman, 2005). However, according to Hadani and Schuler (2013) firms also have the ability to neutralize industry regulations. Since, RDT posits that firms that are dependent on government for favourable policies or revenues use CPA to shape their relationship with government (Getz, 1997), it could be argued that firms use CPA to neutralize government regulations, which in turn may increase a firm’s performance.

Moreover, Hillman and Hitt (1999) show that government decision-makers, such as legislators and political principals, have the ability to affect the market through regulations. They advocate that the power of government over firms has become so substantial, that ‘government may be viewed as a competitive tool to create the business environment most favorable to the firm’s competitive efforts’ (p. 826). Thus, it can be argued that firms engage in CPA activities in order to use the government as a competitive tool. Eventually, this ‘government tool’ may then be used to shape the competitive environment more favorable to the firm, leading to an increased performance.

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At last, Hadani and Schuler (2013) showed that firms from regulated industries realize a positive association between the firm’s use of CPA and market valuation. They suggest that firms that use CPA convince government officials to change public policies in a manner more favorable to the firm then to other firms in the industry (Hadani & Schuler, 2013). Additional, also Brown et al. (2006) find that firms in regulated industries are more likely to use CPA to gain government goodwill (Zhang et al., 2016). So, firms use CPA to reduce government policy, regulations, and enforcements (Hillman, 2005; Getz, 1997). This does, however, not mean that a firm’s dependency on government will be reduced. It only allows firms to reduce the uncertainties that come from this dependence and to reduce the likelihood that this dependence will impose negative effects on firm performance (Getz, 1997). In turn, this may then lead to increased firm performance.

In sum, firms that encounter more government regulations show increased levels of dependence and uncertainty (Getz, 1997; Hillman, 2005). Since, dependence and uncertainty are perceived as undesirable, firms use CPA to influence the public policy (Getz, 1997). Consequently, it can be argued that firms in regulated industries have a founded rationale to engage in CPA. Therefore, as it is proven that the use of CPA in regulated industries will eventually increase a firm’s performance significantly (Hadani & Schuler, 2013; Cho et al., 2006; Holburn & Vanden Bergh, 2008; Hillman & Hitt, 1999), this study proposes the following hypothesis:

Hypothesis 1: Corporate Political Activity in regulated industries will be positively associated with Corporate Financial Performance.

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2.4 The political environment

As we have seen in the part above, firms in regulated industries use CPA to influence and shape their political environments. More interesting is to understand how firms in regulated industries try to influence their political environment. There are different forms of CPA firms use in order to influence the public policy process (Schuler et al., 2002; Lord, 2000; Hillman & Hitt, 1999). CPA tactics are generally seen as short-term activities firms use to fine-tune their strategy (Hillman & Hitt, 1999). Many studies distinguish different CPA tactics (Hillman & Hitt, 1999), but treat them as individual activities (Figueiredo & Tiller, 2001; Hillman & Hitt, 1999; Mathur et al., 2013). In this study, the following CPA tactics are being considered: lobbying expenditures, PAC contributions, and revolving doors. According to Hillman and Hitt (1999) firms use different CPA tactics for a varying number of strategic ends. To understand how the different CPA tactics may affect the firms’ political environments, consideration of the firm’s political environment is necessary.

A theory that describes a firm’s political environment is exchange theory (Bonardi et al., 2005; 2006). The exchange theory defines the political market as a continuous interaction between demanders and suppliers of public policy. Firms, consumers, and labor unions can be seen as demanders of public policy, as they want access to the public policy-making process. Legislators, elected politicians, and courts can be seen as suppliers of public policy because they supply access to the public policy in exchange for specific resources they desire. Getz (1997) advocates that the key feature of a relation is the transfer of resources for mutual benefit. So, whereas resource dependency theory highlights a firm’s dependence on another actor, exchange theory is built on the interdependence between two factors (Getz, 1997).

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Schuler et al. (2002) clearly describe this interdependence. They suggest that politicians desire to be (re-) elected. Then, in order to get (re-) elected they need the financial means to collect information (about policy desires of likely voters in their constituency) and to run election campaigns (Schuler et al., 2002). A mean through which politicians get these resources are firms. In other words, government officials supply access to the public policy, in order to get the tools and means to be (re-) elected. In contrary, firms function as the demanders of public policy (Schuler et al., 2002; Lord, 2000). They demand access to the political decision-making process in exchange for their providence of information and financial resources.

So, exchange theory depicts the political environment as a marketplace where public and private actors are interdependent and engage in exchange relations (Hillman & Hitt, 1999; Bonardi et al., 2005; 2006). To enter this political arena or in the attempt to influence public policy-making processes, multiple CPA tactics can be distinguished (Schuler et al., 2002; Hillman & Hitt, 1999).

2.5 Lobbying and PAC contributions

The first tactic this study takes into consideration is ‘lobbying activity’. Lobbying is defined as: “the objective to inform and persuade legislators and their staff by providing specific data, analysis, and opinions on business-related public policy issues” (Lord, 2000, p. 78). So, firms possess and provide certain information that is relevant to legislators and/or regulators (Schuler et al., 2002). Furthermore, lobbying is considered an indirect manner to pressure policymakers (Lord: 2000; Schuler et al., 2012; Hill et al., 2013). It is seen as an indirect manner because the information, firms provide with lobbying, only demonstrate an impression of the behaviors of the politician’s likely voters. In other words, lobbying does not contain the precise behaviors the likely voters will show (Lord, 2000).

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A more direct pressure-oriented tactic is the use of Political Action Committees (PACs). PACs are legal mechanisms, created by corporations, labor unions, environmentalists, and other interest groups, to raise and spend funds to elect and defeat preferred political candidates (Center for Responsive Politics, 2017). These legal mechanisms allow firms to either reward or deny financial support to certain election campaigns (Lord, 2000; Schuler et al., 2002; Hill et al., 2013). In other words, firms that engage in PAC contributions financially support campaigns of politicians whose ideas are in line with that of the firm. Since, campaign contributions cannot flow directly from the firm’s corporate treasury (Lord, 2000), PAC contributions can be seen as a legal mechanism that permits certain organizations to contribute money to politicians (Schuler et al., 2002). PAC contributions that contain more than $5000 must be reported to the Federal Election Commission (FEC) (Lord, 2000; Center for Responsive Politics, 2017).

Further, PAC contributions are considered a direct pressure-oriented tactic because it affects the time and attention of policymakers and even withholds them from other (not to the interest of the firm) matters (Schuler et al., 2002). PAC contributions result in returned telephone calls and scheduled meetings and ensure the best way of effective lobbying (Schuler et al., 2002). Both lobbying and PAC contributions are recognized as different channels of CPA to gain favorable policy outcomes (Hill et al., 2013).

From the perspective of the exchange theory, the ultimate goal for the demanders of public policy is to enhance its market strategies so as to create value for the firm (Getz, 1997). Firms use several tactics to enter the public policy and to influence business-related political issues (Lord, 2000; Schuler et al., 2002; Hadani & Schuler, 2013). Interestingly, firms use multiple CPA tactics simultaneously to

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increase the regulatory support of import tariffs, antitrust decisions, or regulated taxes (Bonardi et al., 2006). Furthermore, Schuler et al. (2002) suggest that firms have huge incentives to combine CPA tactics to gain access to the public policy.

Reasoning from exchange theory politicians encounter several restrictions that withhold them from realizing their desire to be (re-) elected (Schuler et al., 2002). These restrictions are categorized as information, resource, and time-allocation constraints. In order to overcome these constraints and to get (re-) elected, public officials supply public policy. In exchange for access to the public policy, firms function both as a source of information providence (i.e. lobbying) and a source of financial funding (i.e. PAC contributions). Therefore, it is likely to view the two CPA tactics, lobbying expenditures and PAC contributions, as complements rather then distinct tactics (Hillman & Hitt, 1999; Schuler et al., 2002).

Moreover, Hadani and Schuler (2013) call the combined use of lobbying and PAC contributions ‘Corporate Political Investments’ (CPI). Combining lobbying and PAC contributions enable firms to gain the confidence of public officials, to learn about the policy, and to assess the reliability of the various actors (Hadani & Schuler, 2013). The long-term interactions resulting from a combined use of lobbying and PAC contributions also increase the firm’s confidence that it will receive favorable policy decisions (Hadani & Schuler, 2013).

Additionally, Schuler et al. (2002) advocate that the relationships with legislators are bound in trust. As combining lobbying and PAC contributions results in more confidence and long-term relationships, we could argue that this will also contribute to legislators’ trust. Then, since RDT states that firms in regulated industries are more vulnerable to and dependent on government power (Getz, 1997),

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it could be argued that both long-term political relationships and increased trust with public officials could benefit a firm’s performance.

Therefore, it can be argued that firms have more of an incentive to combine the CPA tactics lobbying and PAC contributions, to access the public policy and to establish long-term political relationships in regulated industries (Schuler et al., 2002; Hadani & Schuler, 2013). Accordingly the second hypothesis is stated:

Hypothesis 2: The positive effect of CPA on CFP in regulated industries is positively moderated by a firm’s engagement in PAC contributions.

2.6 Lobbying and revolving doors

Next, this study will consider the tactic revolving doors. Revolving doors are considered as individuals that function as the link between firm and government (Hillman, 2005). Revolving doors stand for former federal employees, such as Congress and senior congressional staffers that spin in and out into jobs as lobbyists, consultants, and/or strategists (Center for Responsive Politics, 2017).

Reasoning from RDT, a way to reduce the risks and uncertainties arising from external dependencies is creating linkages with them (Getz, 1997; Hadani & Schuler, 2013). Hillman (2005) argues that linkages with the sources of external dependence can buffer firms from environmental fluctuations. Additionally, it lowers transaction costs and improves survival and performance (Hillman, 2005). Many firms create linkages with government by hiring politicians or vice versa through the link of ex-employees now working in government.

Furthermore, these political ties provide firms with legitimacy, information, and the regulatory resources (Hillman et al., 2004; Sun et al., 2015). This means firms could use revolving doors not only to mitigate and eliminate environmental risks and

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uncertainties (Hadani & Schuler 2013), but also to provide them with the resources to strengthen their relationship with government. Sun et al. (2012) suggest that business-government interactions play a huge role in determining a firm’s performance. They define individual and institutional linkages between firms and public authorities as Corporate Political Ties (CPT). Building further on this, Hillman and Hitt (1999) distinguish transactional from relational CPA. Relational CPA is focused on ‘building relationships across issues and over time so that when public policy issues arise this may benefit their operations’ (Hillman & Hitt, 1999, p. 828). So when investing in relational CPA, firms have resources and contacts in place in order to adequately handle and influence public policy.

The importance of combining lobbying and PAC contributions, resulting in trust and long-term political relationship with public officials, is already described. Interestingly, an even better way to increase trust and long-term political relationships with public officials is the firm’s use of revolving doors (Hillman, 2005; Schuler et al., 2002; Lord, 2000). As, revolving doors are former employees of the government now working at the firm and vice versa, relationships do not need to be established but already exist (Hillman, 2005). Since, legislators are more likely to rely upon informants that are bound in trust (Hillman & Hitt, 1999; Schuler et al., 2002), it could be argued that when using revolving doors a firms’ lobbying activities could be accelerated and eventually contain better results.

Besides that, Schuler et al. (2002) advocate that, from the demand side of exchange theory, “the pursuit of political advantage through the political process itself is a competitive endeavor” (p. 8). The reason is that firms are competing with other informants with respect to their ability to provide useful information to public officials (Schuler et al., 2002). In order to have an advantage over competitors, access

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to idiosyncratic, difficult to imitate, and tacit resources could be of great importance (Hadani & Schuler, 2013). Interestingly, scholars in the RDT emphasize that revolvers provide firms with legitimacy, regulatory resources (Hillman et al., 2004; Sun et al., 2015), and private information about policy not available to the general public (Hadani & Schuler, 2013). In turn, these resources may provide firms with the advantage over competitors to successfully implement their lobbying strategies. In other words, the factors obtained via the use of revolving doors could enhance a firm its lobbying activities in a way that firms could now more efficiently and at a lower cost than its competitors target public officials (Schuler et al., 2002). In turn, this may eventually lead to an increased performance.

Moreover, as RDT states that government dependency in regulated industries is more substantial (Getz, 1997; Hadani & Schuler, 2013), firms could experience a higher degree of uncertainty. Since, both uncertainty and government dependence are undesirable factors (Getz, 1997), revolving doors can be used to mitigate these factors (Hadani & Schuler, 2013; Sun et al., 2015). As, revolving doors are able to mitigate uncertainty and dependence levels (Hadani & Schuler, 2013; Hillman, 2005), firms could leverage from a less uncertain environment. This could facilitate a firm’s lobbying activities in a way that less focus it laid upon handling dependency and uncertainty levels and more focus is laid upon its lobbying activities. Since, especially in regulated industries this could be of immense importance, it can be reasoned that revolving doors could be of great importance to a firm’s lobbying activities (Hillman, 2005).

Another reason why firms may experience increased performance, when simultaneously using lobbying activities and revolving doors, can be supported using exchange theory. Considering revolvers as experienced employees in both

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government and business, they could better oversee and understand the political arena. Furthermore, they could provide firms with a founded rationale whether or not to engage in lobbying activities with certain political actors. Hillman (2005) defines this as firms leveraging the advice and counsel of revolving doors. This advice and counsel may result in a more effective interaction between a firm’s lobbying activities and public officials (Hillman, 2005).

In sum, this study believes that firms could positively enhance their lobbying activities by using existing links with public officials, strengthened relationships with government, and benefits from the experience in governmental roles, all provided by the use of revolving doors. Since, especially in regulated industries this could be of immense importance, it is reasoned that combining lobbying activities with the use of revolving doors could increase firm performance significantly. That is why the following hypothesis is proposed as:

Hypothesis 3: The positive effect of CPA on CFP in regulated industries is positively moderated by a firm’s increased percentage of revolving doors.

2.7 Lobbying and issue diversification

In order to understand the concept issue diversification, first an explanation is given of the formal procedures, rules, and registration and reporting requirements of firms that engage in lobbying activities. An act that informs the public on those matters is the Lobbying Disclosure Act of 1995 (hereinafter stated as LDA). LDA is introduced because the existing lobbying disclosure rulings had been ineffective. Therefore, and also to increase public confidence in the integrity of the government, US Congress found that a responsible government requires the public awareness of the efforts of paid lobbyists to influence the public policy-making process (LDA, 1995). In other

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words, the act provides insight of firms’ lobbying activities. But what does it mean for a firm to disclose its lobbying activities?

LDA describes that firms, which actively participate in lobbying activities, need to register themselves and their lobbyists. Furthermore, they need to quarterly report (LD-1/LD-2) the specific lobbying issues topics they engaged in (LDA, 1995). These reports about the specific issue topics firms engaged in need to be disclosed for each of the general issue areas predefined by the government (LDA, 1995). Here, a clear distinction is made between a general issue area and the specific issues topics lobbied on. To clarify, in one year a firm could file a specific number of reports within one general issue area. Nevertheless, a smaller number of the specific issue topics, within the general issue area can be distinguished. This means the firm did engage in lobbying activities for the amount of filed reports, however, some of the reports described overlapping issues topics within that specific issue area. This leads to the fact that a firm could file eight reports, of five specific issue topics within one general issue area.

To indicate the difference in lobby strategies, this study defines the concept issue diversification. Issue diversification can be defined as the degree to which firms are diversified in the specific issue areas lobbied on. Here, a higher degree of issue diversification means, firms lobbying activity is divided across more specific issue areas and vice versa. So, some firms choose to keep their lobbying strategy more focused (i.e. higher amount of lobbying activity within only a few different issue areas), while other firms choose to have their lobbying strategy in a more diversified manner (i.e. lower amount of lobbying activity within a lot of different issue areas).

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2.7.1 Diversification and RBV

Many studies have been conducted in order to understand why firms engage in diversification activities (Teece, 1982; Montgomery, 1994; Goold & Luchs, 1993; Chatterjee and Wernerfelt, 1991; Palich et al., 2000; Yamoah & Kanyandekwe, 2014). Diversification strategies are merely focused on firms’ offerings of multiple products, which Teece (1982) defines as multi-product firms. Yet, diversification can be also defined as the simultaneous engagement in multiple activities or markets (Goold & Luchs, 1993; Teece, 1982; Montgomery, 1994). In order to grasps an understanding of the concept issue diversification, it is of significant importance to understand the logics behind diversification strategies. A theory that explains why firms choose to diversify is the Resource-Based View (Chatterjee and Wernerfelt, 1991; Teece, 1982).

The Resource-Based View (RBV) is based on the work of Edith Penrose (1959) and shows that resources are the driving factors behind firms’ growth (Montgomery, 1994; Chatterjee and Wernefelt, 1991). Besides that Penrose (1959) explains that rent-seeking firms diversify in response to the excess capacity of resources (in Chatterjee and Wernefelt, 1991). So, firms possess certain resources that could be used to increase firm performance when diversifying (Arikan & Stultz, 2015). Besides that, Porter (1989) suggests that if a firm could transfer certain skills and resources into a new market, it can gain a competitive advantage over its competitors (in Chatterjee and Wernerfelt, 1991). Then, since also lobbying activities exists of a firm’s deployment of resources, it can be reasoned that they may also choose to diversify their lobbying strategies.

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2.7.2 Nonmarket environment

Then, as the government-business interface can be understood as a market, actors in the political process are viewed as demanders and suppliers of public policy (Hillman & Keim, 1995; Schuler et al., 2002). Public policy can be defined as any form of government action that expresses the interests of political actors (Hillman & Keim, 1995). In turn, firms engage in the political market (e.g. with lobbying activity) to favorably influence this government action (Hillman et al., 2004). These actions in the political market can be described as the firm’s use of nonmarket strategies (Baron, 1995). A nonmarket strategy is explained as a concerted pattern of actions in the nonmarket environment to increase a firm’s value (Baron, 1995).

Baron (1995) suggests a nonmarket strategy is characterized by four factors: issues, interests, information, and institutions. Issues are the topics government actions are built on and can be understood as what nonmarket strategies address (Baron, 1995). Interests are the different preferences of individuals and groups about those issues. Information relates to what the interested parties know or believe about the consequences of actions, and the interests of those parties (Baron, 1995). From an exchange theory perspective, this is understood as the specific information and data suppliers of public policy are interested in (Schuler et al., 2002). At last, institutions stand for the political institutes firms face when entering and engaging in a nonmarket environment. Interestingly, it is stated that differences exist in political preferences among interested parties regarding a variety of nonmarket issues (Hillman & Keim, 1995; Baron, 1995).

Moreover, Baron (1995) shows multiple examples of the importance to integrate a firm’s nonmarket strategy with its market strategy. He states that a nonmarket strategy must function as an enabler or as a complement to a firm’s market

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strategy. An example here would be that a firm lobbies in support of legislation to lower trade barriers. This nonmarket strategy may in turn complement the firm’s market strategy to enter a foreign product-market. So, a nonmarket strategy, which is partly characterized by the issues lobbied on, is often used to create or realize market opportunities for firms. Put differently, a nonmarket strategy has the purpose to shape the firm’s market environment (Hillman & Hitt, 1999; Schuler et al., 2002; Baron, 1995). On the other hand, Baron (1995) suggests nonmarket issues could also arise from a firm’s current market activities.

Since, a firm’s lobbying activity on nonmarket issues can be considered as a consequence or enabler of its market strategies, it can be argued that a certain connection exists between the firm’s issue areas lobbied on and its presence, or future presence, within a particular product-market. Put differently, the more diversified a firm is in its issue areas lobbied on, the more likely the firm also operates in a multitude of product-markets. Then, since nonmarket strategies provide firms with a competitive advantage (Baron, 1995), and also RBV states that firms can gain a competitive advantage when they are able to use their skills and resources is other markets (Chatterjee and Wernerfelt, 1991), it can be reasoned that firms which are more diversified in the issue areas lobbied on, could hold a competitive advantage over possible competitors. Eventually, this competitive advantage may lead to an increase in firm performance.

In addition, although a substantial number of studies find mixed results in the diversification – performance link (Palich et al., 2000), Yamoah and Kanyandekwe (2014) advocate diversification into different product-markets can be successful. They argue firms diversify to more fully utilize their existing resources and capabilities and to escape from undesirable or unattractive industry environments. Since, RDT states

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that regulated industries are undesirable (Hadani & Schuler, 2013; Getz, 1997) and Baron (1995) suggests nonmarket strategies are especially crucial in highly government-controlled industries, it can be reasoned that, especially for firms in regulated industries, diversification into different product-markets may increase firm performances significantly.

Furthermore, firms engage in lobbying activities to mitigate dependency and to strive for a favourable ruling (Hillman, 2005). However, this doesn’t always mean firms succeed in achieving a favourable policy (Mellahi et al., 2016; Aggarwal et al., 2012). The chance exists lobbying activities will not yield any positive results. So, it can be argued that lobbying activities contain risk of failures. In order for firms to decrease risk of failures, they may choose to diversify their activities. Namely, a firm that offers multiple different products is less dependent on its customers, then a firm that only supplies a few different products (Pfeffer and Salancik, 1979). Therefore, it can be argued that firms diversify in order to spread their risk of failures across multiple organizational areas.

Linking this to issue diversification, it could be argued that firms with a higher level of issue diversification could benefit from the fact that it will lower their risk of failures. In other words, issue diversified firms, may fail in achieving favourable rulings in specific issue areas, but could still benefit from favourable rulings in other issue areas. Thus, a firm’s degree of issue diversification could affect its risk of failure. Automatically, this influences a firm’s lobbying activities, because the chances of successfully influencing the public policy are increased.

At last, it could be argued that access within one specific issue area will not directly mean firms have a competitive advantage. It can be argued, that given the complexity of today’s business environments, a current nonmarket strategy never only

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resides within one particular issue area. For example, taking the travel company Expedia, their complex business environment has interfaces with different issue areas, such as ‘Travel & Tourism’, ‘Transportation’, ‘Aviation, Airlines & Airports’, etc. A favourable ruling in one of the issue areas will not lead to a competitive advantage, because other issue areas could also affect the business environment of Expedia. In other words, even if firms benefit from the relationship with political actors in a particular issue area, they could still experience possible drawbacks from political actors in other issue areas. Thus, in order for firms to have an effective nonmarket strategy, they need to receive governmental support over a broad spectrum of issues. Therefore, a higher degree of issue diversification may lead to an increase of firm performance.

In conclusion, this study argues that firms with a higher degree of issue diversification hold a competitive advantage over its competitors. Thus, the last hypothesis is constructed as:

Hypothesis 4: The positive effect of CPA on CFP in regulated industries is positively moderated by a firm’s higher degree of issue diversification.

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2.8 Conceptual framework

In order to give a better understanding of this study’s research design, in figure 1 a schematic overview of the conceptual framework is given.

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3 Methodology

In this chapter the methodology of this research is disclosed. A rationale is given regarding the scope of this research. Furthermore, data collection, methods and data measures are described. At last, the strengths and limitations of the data collection process are being discussed.

3.1 Data and Methods

This quantitative study used a deductive approach, whereby hypotheses where developed and tested based on existing theory (Bryman & Bell, 2015). Furthermore, most of the companies used in this sample are publicly held and have rigorous reporting requirements set by the U.S. Securities and Exchange Commission (SEC). Data on the variables was collected using financial statements such as annual 10-K filings, firms’ websites, the fortune 500 website, and the Center of Responsive Politics (2017). Furthermore, financial data was derived using the database Compustat. Next an overview of the sample and different measures is given.

3.2 Sample

The sample consisted of Fortune 500 companies in the United States over the period of 2012 to 2015. Both public and private companies, that have their reports publicly available, are included. The total data set initially consisted of 593 firms. However, due to mergers/acquisitions and incomplete data the number of usable firms dropped to 528. This sample is chosen, as the Fortune 500 companies are the largest U.S. corporations by total revenue for their respective fiscal years. The rationale for this sample is that a firm’s size and revenues are seen as important determinants to Corporate Political activity (Lux et al., 2011; Hillman et al., 2004). This means the

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sample most likely entails fruitful information in order to assess the CPA-CFP relationship.

Nevertheless, as this study takes industry regulations into consideration a dummy variable is computed. This dummy is made to distinguish regulated and non-regulated industries based on Coates and John (2012). Here, a 1 is given to firms present in regulated industries and a 0 is given to firms in non-regulated industries. Since, firms operating in regulated industries have greater incentive to engage in CPA (Hadani & Schuler, 2013; Cho et al., 2006; Holburn & Vanden Bergh, 2008), only firms operating in regulated industries will be taken into account. Therefore, our final sample consists of 165 firms.

3.3 Measures

3.3.1 Dependent variables

Return On Assets. The overarching dependent variable in this study is firm performance, defined as Corporate Financial Performance (CFP), and will be assembled using Compustat. Data will be obtained using the accounting measure Return On Assets (ROA), because it indicates how profitable a company is relative to its total assets. Besides that it entailed the most usable data. ROA is measured as the net income value of the firm divided by its total assets.

3.3.2 Independent variables

Lobby expenditures. The first independent variable in this study is lobby expenditures and will be collected using the website of Center of Responsive Politics (2017). This is a nonpartisan, independent, and non-profit research group tracking money in the U.S politics. The platform is free accessible via https://www.open

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firm’s total lobby expenditures will be taken into account. CPA in this research is understood as the firm’s lobbying expenditures.

PAC Contributions. The next independent variable is Political Action Committees (PAC) contributions. Yet again, data on PAC contributions is collected using Center of Responsive Politics (2017). Hereby, the total value of a firm’s PAC contributions, to both democratic and republican parties, in the election cycles 2012 and 2014 has been considered. Then, a dummy is made in order to distinguish the firms that engage in PAC contributions from those that are not active in this form of CPA. That is, a binary variable is created, set equal to 0 for firms that lack any sign of activity on PAC in both election cycles, and equal to 1 when PAC contribution had been made, in at least one of the two 2012 – 2014 election cycles.

Revolving doors. The third independent variable considered in this study is revolving doors. Revolving doors are considered as former federal employees now working for the company. Data on revolving doors is gathered using the Center of Responsive Politics (2017). First the total numbers of a firm’s lobbyists and revolving doors, for all 2012 - 2015 years, has been collected. Then, an average of the four years has been calculated. At last, a percentage variable is computed dividing the firm’s the total number of revolvers by its total number of lobbyists. To clarify, a value of 0.45, means 45 percent of a firm’s lobbyists are revolving doors (i.e. formal federal employees).

Issue diversification. The last independent variable consists of firm’s degree of issue areas lobbied on. This data is accessed via the Center of Responsive Politics (2017). In order to compute the variable issue diversification, data is collected regarding the total number of cases a firm engaged in lobbying activities (i.e. the filed reports), and the number of reports for only the firm’s top three issue areas. Then, the

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firm’s combined reports of its top three issue areas are divided by its total number of reports. This results in a variable consisting of values between 0 and 1. Here, values closer to 1 can be labeled as firms having a lower degree of issue diversification, because it means the firm is relatively more concentrated in the issue areas lobbied on.

3.3.3 Control variables

Size. Firm size is measured as the firm’s logged numbers of employees and will be obtained from the database COMPUSTAT. According to the Hillman et al. (2004), firm size can be seen as an important antecedent of CPA. Firm size can be understood as a proxy for resources and provides some indication about the firm’s ability to engage in any forms of political activity (Hillman et al., 2004). Besides that, size may also be related to a firm’s levels of diversification (Chatterjee & Wernerfelt, 1991).

Leverage. Leverage is measured as the firm’s total liabilities divided by its equity and will be obtained from COMPUSTAT. Leverage is chosen as it relates both to lower lobbying, because of the discipline imposed by debt, and greater lobbying, because it may be seen as a solution to the problems and risks arising from higher levels of leverage (Mathur et al., 2013). Besides that, both control variables are chosen, as they may have an impact on the CPA – CFP relationship (Lux et al., 2011; Hillman et al., 2004).

3.4 Strengths and limitations

A limitation of this research is that the computed dataset is built with a group of eight other researchers. Every researcher got a selection of approximately ninety Fortune 500 companies they had to collect data on. In this process researchers collected data

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on the same preselected variables. So, many researchers collected data on variables not to their interests. This could have led to unintended mistakes and errors in the dataset.

However, in order to reduce the possible errors a measurement of ‘interrater reliability’ was executed. This includes procedures that measure agreement among the various data collectors (McHugh, 2012). Here, interrater reliability was measured as a percent agreement among the data collectors. In order to compute a percent agreement, four pairs of researchers were created. Each pair randomly picked ten firms of each other’s sample, in order to reassemble data. Then, data was compared and a 0 was given to matching data and 1 to non-matching data. Finally, a total percent agreement was computed, dividing the total number of non-matching data by the total number of matching data. This led to a percent agreement of 98,37 percent. Besides that, the non-matching cases were corrected. This gave the researcher a better prospect of what’s out there.

Another possible limitation of this research design is that the money spent within the specific number of issue reports is not measured. In other words, the magnitude of a firm’s lobbying within one of the specific issues remains undiscovered. This also applies for the variable PAC contributions. However, since this study is testing the possible moderating effects of issue diversification and PAC contributions, on the CPA – CFP relationship, it provided this research with sufficient information. Here, the money spent on a specific issue area or on PAC contributions is less relevant.

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4 Results

In this section, the different hypotheses are tested. First, a linear regression test is conducted to understand the relationship between CPA and CFP in regulated industries. Then, the study’s intention is to estimate whether the moderating effects of the different CPA tactics and issue diversification, affect a firm’s performance.

4.1 Descriptive statistics and correlations analysis

To start the data analysis process properly, first a check of frequencies was done. A few missing values and errors were found and if possible, enriched. To exclude any discussion whether a specific fiscal year is not representative to the findings, the researchers calculated an average measure. This average is conducted taking a mean of the years 2012 – 2015 for every variable used. Besides that only firms in regulated industries are taken into account.

This process led to the creation of the following variables: RA_L (Regulated Average Lobby Expenditures), RDA_PAC (Regulated Dummy Average PAC contributions), RPA_REV (Regulated Percentage Average Revolvers), RPC_IS (Regulated Percentage Concentration Reports), RA_ROA (Regulated Average Return On Assets), RA_LEV (Regulated Average Leverage), and RA_EMP (Regulated Average Employees). There were only a few missing values detected in the ROA variable. These were pairwise excluded, as firms could still have fruitful data in the other years.

In figure 2 an overview of the means, standard deviations, number of cases, and a correlation matrix is reported. Interestingly, the correlation matrix shows that PAC contributions (r = ,288**), revolving doors (r = ,172*), and issue diversification (r = -,366**) all have a significant correlation with lobbying activity. This means that

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when a firm’s lobbying activity increases, it will likely also increase PAC, revolving doors, and issue diversification. Interestingly, issue diversification shows a negative r. This can be explained because issue diversification is measured as the degree to which firms are diversified in their lobbying strategy. Here, numbers closure to 1 mean firms are less diversified and more concentrated in their lobbying strategy, and numbers closure to 0 mean firms are more diversified in their lobbying strategies. As the r of issue diversification is negatively related to lobbying activity, it can be assumed that the more firms engage in lobbying activity, the less concentrated their lobbying strategy will be.

Furthermore, no correlations occur between firm performance (ROA) and lobby expenditures (,137), PAC contributions (,061), revolving doors (,085), and

issue diversification (-,104).

Figure 2: Descriptives and Correlation Matrix

To successfully test the moderating effects of PAC contributions, revolving doors, and issue diversification on the relationship between CPA and firm performance in regulated industries, values have to be standardized. This needs to be done before executing a PROCESS model 1 interaction analysis presented by Andrew

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Hayes. Therefore the following variables were transformed into Zscores: lobbying activity (ZRA_L); revolving doors (ZRPA_REV); issue diversification (ZRPC_RE); return on assets (ZRA_ROA); leverage (ZRA_LEV); size (ZRA_EMP).

4.2 Hypothesis testing

To understand the relationship between regulated firms engaging in lobby activity (RA_L) and firm performance (RA_ROA), a hierarchical multiple regression analysis was performed. This technique allowed this study to examine the possible linear relationship between lobbying activities and firm performance. First, in order to control this for other prediction variables, both leverage (RA_LEV) and size (RA_EMP) were inserted in the first box of the hierarchical multiple regression. In the second box lobbying activity were entered (RA_L). The first box showed no statistically significance F (2, 160) = ,189; p > ,05 and explained 0,2% of variance in firm performance. The second box explained a variance of 2,3% F (3, 159) = 1,263; p > ,05. Thus, the introduction of lobbying activity explained an additional 2.1% of variance in firm performance, after controlling for leverage and size (R2 Change = ,021; F (1, 159) = 3,404; p > ,05).

In both boxes no statistically significance was found. Nevertheless, in box two lobbying activity showed a tendency towards significance (p = ,067) with a standardized ß of ,175. This means that for 1 increase in lobbying, it could be said that firm performance will have a tendency to increase with ,175 standard deviations. However, since no real significance was found (p > ,05), Beta cannot be used to predict a change in firm performance. Since no significance was found (p > ,05) on the effect between lobbying activity and firm performance, hypothesis 1 is rejected. For an overview of the results see figure 3.

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Figure 3: Descriptives and Correlation Matrix

Next the first moderator PAC is tested. With the analysis we determine whether PAC contributions have a significant effect on the relationship between lobbying activity (CPA) and firm performance (CFP). To test this moderating effect, the PROCESS macro written by Andrew F. Hayes for SPSS is used. In this model, the moderator PAC contributions is categorical, therefore only lobbying activity was used as a standardized variable.

The regression coefficient for PAC*Lobbying is c3 = 0,0256 and is statistically non-significant from zero, t (157) = ,8033; p = ,423. As p > 0,05 it can be concluded that the effect of lobbying activity on firm performance does not depend on whether or not firms engage in PAC contributions. Thus, it can be concluded that no moderation effect is present. Therefore hypothesis 2 is totally rejected. See figure 4 for an overview of the results.

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Figure 4: Process by Andrew F. Hayes – Moderation effect of PAC contributions

Then, this study proceeds towards the second moderation analysis to determine whether the use of revolving doors in lobbying activity has a significant effect on the CPA-CFP relationship suggested by hypothesis 3. To test this moderating effect, once again PROCESS by Andrew Hayes is used. The regression coefficient of Revolving doors*Lobbying is c3 = 0,0089 and is statistically not different from zero, t (142)= 1,5193, p = 0,1309 (which is p > ,05). Therefore, the effect of revolving doors on the CPA-CFP relationship is not significant. Thus, also hypothesis 3 is rejected. Look at figure 5 below, for the results of this moderation.

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Figure 5: Process by Andrew F. Hayes – Moderation effect of revolving doors

Lastly, the fourth hypothesis is tested. This hypothesis suggests there is a moderating effect of issue diversification on the CPA-CFP link. Since, issue diversification is a numerical variable it is standardized (ZPC_RE). The regression coefficient, formulated by PROCESS, of Issue diversification*Lobbying is c3 = 0,0032 and is statistically not different from zero, t (140)= 0,7425, p = 0,459 (which is p > ,05). Therefore, it can be stated that no moderating effect is proved of issue diversification on the CPA-CFP link. In conclusion, hypothesis 4 is wholly rejected. Look at figure 6 below, for the results of this moderation analysis.

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5 Discussion

This study was conducted to examine how specific CPA tactics and issue diversification could moderate the relationship between CPA and CFP in regulated industries. Overall, no significant effects on firm performance occurred when combining different CPA tactics in regulated industries. Also, a firm’s degree of issue diversification has not shown to be a predictor of CFP. As a result all four hypotheses were rejected. In this section, first a discussion of the results will be disclosed. Then, the contributions of this research will be discussed. Eventually, the limitations of this study and recommendations for future research will be given.

5.1 Discussion of the results

Interestingly, a substantial debate has arisen on the effects of a firm’s market structure on the CPA – CFP relationship (Hillman & Hitt, 1999; Bonardi et al., 2005; 2006). In particular the characteristics of a firm’s regulatory-political environment have been considered to be of significant importance (Hadani & Schuler, 2013; Hillman & Hitt, 1999). Following resource-dependency theory, several studies have shown that CPA is used in order to thwart or shape government regulations favorable to the firm’s preferences (Hillman, 2005; Getz, 1997; Hadani & Schuler, 2013). Departing from this line of theory, this study hypothesized that the CPA – CFP relationship in regulated industries will be positively associated. Nevertheless, looking at the results from testing this hypothesis, no significant effect was found (p > ,05).

This result is different from the results showed by Hadani and Schuler (2013). However, in comparison to Hadani and Schuler’s (2013) significantly positive result, two major differences can be distinguished. Firstly, Hadani and Schuler (2013) understood CPA as a collection of investments in four different political areas

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(lobbying activities, PAC contributions, soft money contributions, and contributions to 527 groups), while this study’s hypothesis is solely focused on a firm’s investments in lobbying activities. Secondly, a different measurement of industry regulations was used. Hadani and Schuler (2013) categorized firms from regulated industries according to Pittman’s (1977) model, while this study used the model provided by Coates and John (2012). Both models classify regulated industries in different ways, which may have led to the different outcomes.

Moreover, increasing attention is being paid to the way firms try to influence their political environment (Lord, 2000; Schuler et al., 2002; Mathur et al., 2013; Lux et al., 2011; Hillman et al., 2004; Hillman & Hitt, 1999). Reasoning from RDT (Getz, 1997; Hillman, 2005) and exchange theory (Lord, 2000; Schuler et al., 2002; Bonardi et al., 2005; 2006) this study hypothesized that PAC contributions and revolving doors could positively moderate the CPA-CFP relationship in regulated industries. However, for both PAC contributions and revolving doors a non-significant moderating effect was found. PAC showed a moderating value of p = 0,423 and revolving doors p = 0,1309.

Linking this to Schuler et al. (2002), it can be argued that they provided empirical evidence on the fact that firms have tremendous incentives to combine CPA tactics. However, they did not provide empirical evidence on the combined use of CPA tactics on firm performance. Thus, even if firms are more likely to combine CPA tactics (Schuler et al., 2002), it may explain any increase in firm performance. Furthermore, it can be argued that firms may attain their political goals through the use of a single tactic only (Schuler et al., 2002). In other words, also firms that engage in a single form of CPA can perceive an increase in CFP.

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The last hypothesis this study investigated is the role of a firm’s degree of issue diversification on the CPA – CFP relationship. Reasoning from a nonmarket theory the following hypothesis was tested: The positive effect of CPA on CFP in regulated industries is positively moderated by a firm’s higher degree of issue diversification. The result of this hypothesis is non-significant (p = 0,459).

It is very difficult to interpret this result in light of the existing literature, because no literature exists on issue diversification. However, arguing from nonmarket literature it can be stated that a non-significant effect occurs due to a lack of effective nonmarket implementation and integration (Baron, 1995). Another reason for this non-significant effect is that a business strategy is not congruent with the capabilities of a firm and the characteristics of its environment (Baron, 1995). Put differently, firms may invest in nonmarket strategies, but lack the ability to conform it to their market strategies. Eventually this may be the cause for a non-significant effect in the fourth hypothesis.

5.2 Contributions

An aim of this study was to contribute to RDT and exchange theory, by showing that combining tactics could possibly mitigate the relative high uncertainty and dependence levels in regulated industries. However, even that both resource dependency theory and exchange theory provide a compelling logic for firms in regulated industries to benefit from the use of CPA (Getz, 1997; Hillman, 2005; Schuler et al., 2002; Hadani & Schuler, 2013, exchange theory also suggests that CPA will not contribute towards improving CFP (Hadani & Schuler, 2013). The exchange theory, or as Hadani and Schuler (2013) name it the political marketplace theory, argues that even if firms have a founded rational to engage in CPA (such as provided by RDT), they compete against other firms for the limited access to the public policy

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(Hillman & Hitt, 1999). Then, since competition is fierce and access to the public policy is difficult, it may be argued that firms face a low probability of success (Hadani & Schuler, 2013). This could explain the non-significant effect of firms combining CPA tactics in the political environment.

Furthermore, the conceptualization of the factor issue diversification may have extended current literature by introducing a new field of research. Then, even the fact that the issue diversification hypothesis was rejected, it can be argued that the study’s theorizing about issue diversification contributed to existing literature in different ways. First, RBV may have been extended, showing that firms might possess resources that can be utilized in the nonmarket environment. Secondly, it may be argued that nonmarket strategy may have been extended, arguing that the nonmarket issue areas lobbied on hold a considerable connection with a firm’s market strategy. Subsequently this knowledge can be used in order to affect firm performance.

In conclusion, this study did not provide the evidence for the possible moderating effects of PAC contributions, revolving doors, and issue diversification. However, it can be argued that the theorizing part of this study may hold interesting features that may have extended current literature in various areas.

5.3 Limitations

As with many other studies in the CPA area, also this study comes with different limitations. First, as the scope of this study solely existed of firms present in regulated industries, there has been a significant reduction in the sample size. From the 528 companies, this study only identified 165 firms present in regulated industries. This relatively low number of firms makes it hard to generalize the results of this study. Therefore, future research could repeat this study testing for a larger sample size.

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Hence, the measurement process of this study’s main constructs is debatable. For example, PAC contributions are measured as a dummy. This measurement method ignores the magnitude of the contributions. Furthermore, no difference is made between companies that participated in one of the election cycles and companies that participated in both cycles. In other words, even if there was a significant difference in the magnitude of firms’ PAC contributions or in the fact that they only contributed once, they are labeled as the same category (i.e. PAC = 1). Nevertheless, this measurement simplified the process and allowed this study to test whether the combinations of certain forms of CPA hold any significant effects on CFP.

Besides that this study introduces the concept issue diversification. Since, this concept has never been measured and tested before, it can be argued that possible limitations reside within the measurement process of this concept. For example, issue diversification is measured as the percentage of reports divided over the firm’s top three issue areas. Hereby, no attention is being paid to the magnitude of each specific report. This means a firm might file 4 reports with a total magnitude of forty thousand dollars, while another firm could file 16 reports with a magnitude of twenty thousand dollars. As this study is solely focusing on the amount of reports, this measurement process may misinterpret the true values of reality. Besides that, also complete understanding of the specific issues lobbied on is disregarded by this method, and can be seen as a huge limitation in this study. In order to enrich the measurement section, future research might include the magnitude of the different CPA tactics used by firms.

Furthermore, this study solely focused on the combined use lobbying activity with PAC contributions or revolving doors. Therefore, this study falls short in a way

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that other possible combinations of CPA tactics are neglected. Besides that, also other CPA tactics that are positively associated to firm performance are not taken into account, such as constituency building and advocacy advertising (Hillman & Hitt, 1999; Hadani & Schuler, 2013; Lord, 2000). It would have been ideal to test additional forms of CPA and their possible combinations. Therefore, it is strongly recommended for future research, to test a variety of possible CPA combinations on firm performance.

Furthermore, I would strongly recommend future research to focus on other potential factors that may influence the firms its issue lobbied on. I believe that a huge variety of factors may influence a firm’s decision to engage in a certain lobbying strategy.

The role of combining CPA tactics and issue diversification on the CPA-CFP relationship in highly regulated industries