The liabilities of foreign institutional ownership: Managing political dependence through corporate political spending

Abstract

Research SummaryThe benefits of foreign institutional ownership (FIO) have been amply researched, but there are also potential downsides to such ownership. High FIO can subject a firm to heightened regulatory scrutiny and compliance, increasing its political dependence. Drawing on resource dependence theory, we argue that firms can manage the political dependence that arises from FIO by engaging in corporate political spending (CPS). We derive two moderating conditions from our theoretical argument, positing that the strength of the positive relationship between FIO and CPS hinges on the intensity of a firm’s government contracting and on the political sensitivity of the industry. Our study advances strategic ownership research by highlighting that U.S. firms may need to manage the potential liabilities associated with FIO through nonmarket strategy.Managerial SummaryResearch suggests that firms can reap many benefits from equity investments made by foreign institutional investors. However, such investments may also have potential downsides. We posit that high levels of FIO may subject a firm to increased political and regulatory scrutiny, and that firms can manage this increased exposure to government by engaging in corporate political activities that allow them to monitor and influence the political landscape. To explore this question, we analyzed a large sample of publicly traded U.S. firms and find empirical support for our arguments. Our study highlights an unintended “liability” of FIO that firm executives should be aware of and has practical implications for how firms manage their investors and allocate resources between market and nonmarket strategies.