how does accounting fit into a firm’s political strategy?

Journal of Accounting and Public Policy 25 (2006) 195–228

www.elsevier.com/locate/jaccpubpol

How does accounting fit into a firm’spolitical strategy?

Derek Johnston a,*, Denise A. Jones b

a Colorado State University, 256 Rockwell Hall, College of Business, Fort Collins, CO 80523, USAb College of William and Mary, School of Business Administration, P.O. Box 8795,

Williamsburg, VA 23187, USA

Abstract

This paper investigates whether accounting plays a role in a firm’s political strategy.Specifically, we investigate whether there is a relation between lobbying expendituresand incentives to lobby to influence accounting standard setting. We identify three sig-nificant accounting issues that were under consideration by either the FinancialAccounting Standards Board or the Securities and Exchange Commission during1999 and 2000. First, in late 1998, the SEC implemented an action plan to make it moredifficult for companies to manage earnings. Second, the FASB was deliberating a newset of standards for business combinations. Third, both the SEC and the FASB delib-erated on accounting rules that would make the reporting of liabilities on the balancesheet more transparent. We develop several proxies to capture the extent to which firmswould be affected by both the FASB and SEC accounting pronouncements under con-sideration. After controlling for other incentives to lobby, we find that lobbying expen-ditures are associated with firms’ incentives to lobby on accounting related issues. Ourresults are robust to a correction for potential self-selection bias resulting from firms’decisions to lobby or not.� 2006 Elsevier Inc. All rights reserved.

0278-4254/$ - see front matter � 2006 Elsevier Inc. All rights reserved.doi:10.1016/j.jaccpubpol.2006.01.005

* Corresponding author. Tel.: +1 970 491 6443; fax: +1 970 491 2676.E-mail address: [email protected] (D. Johnston).

mailto:[email protected]

196 D. Johnston, D.A. Jones / Journal of Accounting and Public Policy 25 (2006) 195–228

Keywords: Lobbying; Earnings management; Accounting regulation

1. Introduction

This paper investigates whether accounting plays a role in a firm’s politicalstrategy. Specifically, we investigate whether there is a relation between lobby-ing expenditures and incentives to lobby to influence accounting standard set-ting. While anecdotal evidence suggests that accounting policy formation isaffected by corporate lobbying activity (Beresford, 2001; Crenshaw, 2000;Davis, 2000; Eden and Davis, 2000; Hinchman, 2000; Osterland, 2000; Tuckey,2000; Williams, 2000), there is little empirical research investigating this issue.

Managers can attempt to influence the accounting standard setting processdirectly by lobbying the Securities and Exchange Commission (SEC) or bywriting comment letters to the Financial Accounting Standards Board (FASB).They can also influence the accounting standard setting process indirectly bylobbying Congress to put pressure on the FASB or the SEC (Sutton, 1984).Previous studies have focused on comment letters written to the FASB relatedto specific accounting standards (see e.g., Ettredge et al., 2002; Dechow et al.,1996; Addy and Swanson, 1994; Ndubizu et al., 1993; Mian and Smith, 1990;Deakin, 1989; Francis, 1987; King and O’Keefe, 1986; Kelly, 1985; Dhaliwal,1982). However, Congressional pressure may have a much greater impact onthe standard setting process than writing comment letters as Congress hasthe ability to initiate legislation, which would ultimately undermine the FASB’sauthority and may threaten the FASB’s survival (Beresford, 2001, 1995). Thisis the first paper, we are aware of, that provides evidence on whether lobbyingwith both the SEC and Congress is associated with accounting incentives.

Corporations become involved in politics when public policy outcomes arerelated to the firm’s economic success (Keim and Baysinger, 1988). For example,managers lobby to protect legislation favorable to current business practices(Baysinger, 1984), to influence tax legislation (Freed and Swenson, 1995), to cre-ate barriers to entry (Dean et al., 1998), and to protect against foreign competi-tion (Morck et al., 2001; Lenway et al., 1996; Schuler, 1996; Grier et al., 1994).Managers also have incentives to lobby on accounting issues because contractsoften rely on numbers reported in financial statements, leading to economic con-sequences when accounting rules change (Watts and Zimmerman, 1978). Weexamine overall lobbying expenditures for 390 firms during the period 1999 to2000. Overall lobbying expenditures includes all lobbying of covered executiveor legislative branch officials, including Members of Congress and the SECCommissioners, as well as certain employees of Congress and the SEC. Sincefirms lobby for both accounting and non-accounting reasons, our modelincludes variables that capture both accounting and other incentives to lobby.

D. Johnston, D.A. Jones / Journal of Accounting and Public Policy 25 (2006) 195–228 197

Based on a review of the FASB’s and SEC’s activities, we identify three signif-icant accounting issues that were under consideration during the period 1999 to2000. First, in late 1998, the SEC implemented an action plan to make it harderfor companies to manage earnings. Second, the FASB was deliberating on a newset of standards for business combinations. Finally, during this time period, boththe SEC and the FASB deliberated on accounting rules that would make thereporting of liabilities on the balance sheet more transparent. As the propensityfor accounting related lobbying is increasing in the magnitude of the perceivedwealth effect (Sutton, 1984), we expect that managers of firms whose financialstatements will be directly affected by proposed accounting rule changes willbe likely to lobby on the proposed change. Consistent with this expectation,the empirical analyses suggest that the amount firms spend on lobbying is asso-ciated with firms’ incentives to lobby on accounting related issues, after control-ling for other reasons to lobby. Our results are robust to a correction forpotential self-selection bias resulting from firms’ decisions to lobby or not.

We also examine whether all firms in our sample have the same propensity tolobby. Hillman and Hitt (1999) argue that firms generally adopt either a long-term, relationship building approach or a transactional approach to politicalstrategy. Similarly, Morck et al. (2001) conclude that there exist two types oflobbyers: (1) the habitual lobbyer, whose lobbying activity depends primarilyon its lobbying activity from the previous period; and (2) the occasional lobbyer,whose lobbying depends less on past lobbying and more on other firm-specificfactors. To explore any inter-firm differences, we split our sample into twogroups: (1) firms that have in-house lobbying departments and, therefore, aremore apt to spend an amount approximately equivalent to the previous period’slobbying costs (habitual lobbyers); and (2) firms that outsource all of their lob-bying activity (occasional lobbyers). The empirical results suggest that proposedchanges to accounting regulation influences the amount occasional lobbyersspend on lobbying, but has no impact on the costs incurred by habitual lobbyers.

The remainder of the paper is organized as follows. Section 2 discussesaccounting related regulatory activity and the research design is presented inSection 3. We present the results and additional empirical analyses in Sections4 and 5, respectively. Section 6 concludes.

2. Accounting related regulatory activity

2.1. Political pressures on the accounting standard setting process

In recent years, large corporate accounting scandals, such as Enron andWorldCom, have focused the attention of policy makers on how financialinformation is provided to the general public. In 2002, the Sarbanes–OxleyAct (the Act) was enacted specifically to ‘‘protect investors by improving the


accuracy and reliability of corporate disclosures made pursuant to the securi-ties laws.’’1 Under the current provisions of the Act, the setting of accountingstandards remains the same. In particular, the SEC has the ultimate authorityover the setting of accounting standards and may recognize as ‘‘generallyaccepted’’ any accounting principles established by a standard setting bodymeeting specific requirements,2 currently the FASB. The SEC currently recog-nizes all accounting standards promulgated by the FASB as the primaryaccounting standards for US publicly traded companies. However, the SECalso sets accounting rules in two ways. First, Staff Accounting Bulletins (SABs)are issued by the Division of Corporate Finance and Office of the ChiefAccountant of the SEC. While not law, these bulletins reflect the SEC staff’sopinions about how the disclosure requirements of the federal securities lawswill be enforced. Second, an accounting requirement will occasionally fallunder Regulations S-X and S-K. On all proposed changes to the official rulesgoverning the securities industry, the SEC typically gathers public commentsfor a period of 30–60 days before the final rule is issued.

The FASB’s standard setting process is very transparent to the general pub-lic. Prior to issuing a financial accounting standard, a project is first added to theFASB’s technical agenda. If the project is of a large enough scope, the FASBmay prepare a Discussion Memorandum. The addition of the project to thetechnical agenda, the Discussion Memorandum (if issued), and when the FASBwill be discussing the issue are all disclosed to the public. When the boardreaches a consensus, an Exposure Draft is written and is released to the publicfor comment. Next, the FASB reviews any comment letters received, meets forfurther deliberation, and issues the final Statement of Financial AccountingStandard (SFAS). Concerned parties essentially have from the time the discus-sion memorandum or exposure draft is made public until the time a finalaccounting standard is issued to influence the FASB’s decision making process.

Managers can attempt to influence accounting standard setting both directlyand indirectly (Sutton, 1984). They can influence standard setting directly bylobbying with the SEC and by writing comment letters on proposed standardsto both the FASB and the SEC.3 For example, the CEO of Cisco, John Cham-

1 Public Law 107-204, a copy of the Sarbanes–Oxley Act can be obtained from the PublicCompany Accounting Oversight Board website at www.pcaobus.org.

2 See section 108 of the Sarbanes–Oxley Act.3 Several accounting studies have examined the content of comment letters to the FASB. These

include comment letters related to proposed standards on the accounting for foreign currencytranslation (Kelly, 1985), the accounting for oil and gas exploration costs (Deakin, 1989; King andO’Keefe, 1986), the capitalization of interest costs (Dhaliwal, 1982), the accounting for employeestock options (Dechow et al., 1996), the accounting for defined benefit pension plans (Ndubizuet al., 1993; Francis, 1987), the disclosure of segment information (Ettredge et al., 2002), theconsolidation of subsidiaries (Mian and Smith, 1990), and the accounting for deferred income taxes(Addy and Swanson, 1994).

http://www.pcaobus.org


bers, met with then SEC Chairman, Arthur Levitt, about the accounting forbusiness combinations and ‘‘made it plain that if Levitt went ahead with hisplans, he would have to contend with the substantial lobbying weight of Ciscoand every other tech company’’ (Beresford, 2001, p. 79). As discussed in thepopular press, companies also lobbied both Congress and the SEC to changea SAB related to the recognition of revenue (Davis, 2000; Eden and Davis,2000; Osterland, 2000; Williams, 2000).

Further, managers can influence standard setting indirectly by lobbyingCongress to put pressure on the FASB and the SEC. Prior research has shownthat Congress has substantial influence over regulatory agencies, such as theSEC (Snyder and Weingast, 2000; Keim and Baysinger, 1988; Weingast andMoran, 1983). In addition, there is anecdotal evidence that Congress attemptsto change the outcome of accounting standard setting in response to lobbyingfrom interested parties. The typical interchange between the FASB and mem-bers of Congress involves letter writing or casual meetings; however, Congressoccasionally convenes hearings on a proposed accounting standard (Beresford,2001). Generally, Congressional hearings are only arranged when companies orindustry associations have lobbied Congress claiming an accounting standardwill cause economic harm (Beresford, 2001).

As an example, the Senate Banking, Housing, and Urban Affairs Committeeheld a hearing in March of 2000 on the FASB’s business combinations projectand, in May 2000, the House Committee on Commerce held a hearing on thesame subject (Beresford, 2001).4 A number of articles from the popular pressascribe Congress’s interest in the accounting for business combinations to lob-bying by technology companies (Crenshaw, 2000; Hinchman, 2000; Tuckey,2000). Testimony during the hearing included statements that the eliminationof the pooling of interests method of business combinations would hinder inno-vation and economic growth. In addition, Senator Gramm urged the FASB toconsider a periodic review for impairment of goodwill instead of yearly goodwillamortization (Beresford, 2001). Interestingly, in the final accounting standardissued, a yearly goodwill impairment test instead of yearly amortization wasadopted. Thus, there is anecdotal evidence supporting the notion that firmsmay influence the accounting standard setting process by lobbying Congress.

2.2. Specific accounting regulatory activity

Due to data requirements discussed in Section 3, we focus on accountingrelated regulatory activity during 1999 and 2000. Table 1 summarizes allSEC activity related to accounting regulations. Table 1, Panel A shows thatthe SEC staff issued three SABs during 1999 and 2000. As shown in Table 1,

4 Executives from three of our lobbying sample firms testified before Congress on this matter.

Table 1Summary of SEC activity during 1999 and 2000

Panel A: Summary of SEC Staff Accounting Bulletins (SAB) issued during 1999 and 2000

SAB number Date issued Description

99 August 13, 1999 Materiality100 November 24, 1999 Restructuring and impairment charges101 December 3, 1999 Revenue recognition in financial statements101A March 24, 2000 Delays implementation of SAB 101 to the

second fiscal quarter of fiscal years beginningafter December 15, 1999

101B June 26, 2000 Delays implementation of SAB 101 to thefourth fiscal quarter of fiscal years beginningafter December 15, 1999

Panel B: Summary of SEC proposed rules outstanding during 1999 and 2000

Reference number Date proposal issued Date final statementissued

Description

33-7649 March 1999 August 2000 Financial statementsand periodic reportsfor related issuers andguarantors

33-7793 January 2000 Supplementaryfinancial information

Panel A: This table reports a summary of all Securities and Exchange Commission (SEC) StaffAccounting Bulletins issued during 1999 and 2000. Detailed information on these SABs can befound on the SEC website http://www.sec.gov/interps/account.shtml.Panel B: This table reports a summary of accounting related Securities and Exchange Commission(SEC) Proposed Rules outstanding during 1999 and 2000. This table was prepared by reviewing theSEC website (http://www.sec.gov/rules/proposed.shtml) and listing the proposed rules related tofinancial reporting.


Panel B, the SEC also proposed two changes to Regulations S-X and S-Krelated to financial reporting. Table 2 lists, in chronological order, all FASBExposure Drafts and Discussion Memoranda that were outstanding during1999 and 2000. From the proposed accounting standards reported in Tables1 and 2, we identify three major accounting issues on which firms might beinterested in lobbying: accounting standards limiting the ability to manageearnings, accounting standards for business combinations, and accountingstandards that would make the existence of debt more transparent on firm’sbalance sheets. The propensity for accounting related lobbying is increasingin the magnitude of the perceived wealth effect (Sutton, 1984). Therefore, weexpect that managers of firms whose financial statements will be directlyaffected by proposed accounting rule changes will be likely to lobby on the pro-posed change. We discuss the three accounting issues and firms’ incentives tolobby on these matters below.

http://www.sec.gov/interps/account.html

http://www.sec.gov/rules/proposed.shtml

Table 2Summary of Financial Accounting Standards under consideration during 1999 and 2000

Date of exposuredraft

Date finalstandard issued

Description

August 1990 (DM),October 2000

May 2003 SFAS 150 – Accounting for certain financialinstruments with characteristics of both liabilitiesand equity

October 1995,February 1999

Consolidated financial statements: purpose andpolicy

February 1996,February 2000

June 2001 SFAS 143 – Accounting for asset retirementobligations

July 1998 June 1999 SFAS 136 – Transfers of assets to a not-for-profitorganization or charitable trust that raises or holdscontributions for others

October 1998 February 1999 SFAS 135 – Rescission of FAS 75 and technicalcorrections

October 1998 June 2000 SFAS 139 – Rescission of FAS 53 and amendmentto FAS 63, 89, and 121

December 1998,a

September 1999June 2001 SFAS 141 – Business Combinations

May 1999 June 1999 SFAS 137 – Deferral of the effective date of SFAS133, Accounting for Derivative Instruments andHedging Activities

June 1999 September 2000 SFAS 140 – Accounting for transfers and servicingof financial assets and extinguishments of liabilities– a replacement of SFAS 125

September 1999,February 2001

June 2001 SFAS 142 – Goodwill and other intangible assets

March 2000 June 2000 SFAS 138 – Amendment to SFAS 133, Accountingfor derivative instruments and hedging activities

June 2000 August 2001 SFAS 144 – Accounting for the impairment ordisposal of long lived assets

June 2000 June 2002 SFAS 146 – Accounting for costs associated withexit or disposal activities

This table summarizes the Financial Accounting Standards Board exposure drafts outstandingduring 1999 and 2000. The table was prepared by reviewing the Journal of Accountancy listing ofexposure drafts outstanding each month. The table is in chronological order beginning with theearliest exposure draft. Discussion memorandums are denoted DM. SFAS denotes Statement ofFinancial Accounting Standard.

a The December 1998 listing for Business Combinations is an invitation to comment on the G4+1recommendations for achieving convergence.


2.2.1. Earnings management

In late 1998, SEC Chairman Arthur Levitt delivered a major address onearnings management (Levitt, 1998). In his speech, Levitt discussed the grow-ing pressure companies are facing to meet earnings estimates and identified fivecommon earnings management practices that are used to manipulate earningsto meet estimates: ‘‘big bath’’ restructuring charges, creative acquisition


accounting, ‘‘cookie jar’’ reserves, revenue recognition, and misuse of material-ity. Chairman Levitt’s speech marked the beginning of an action plan by theSEC to curtail earnings management. This action plan included developinginterpretive accounting guidance, encouraging the FASB to set new standards,and targeting reviews of companies that announce restructuring liabilityreserves, major write-offs, or other practices that appear to manipulateearnings.

Table 1 summarizes the SEC activity in the two years following Levitt’sspeech. During 1999 and 2000, the SEC staff issued three Staff Accounting Bul-letins (SAB) designed to limit some of the earnings management practices iden-tified by Levitt: SAB 99 (materiality), SAB 100 (restructuring and impairmentcharges), and SAB 101 (revenue recognition). Moreover, in January 2000, theSEC proposed a change to Regulation S-K requiring additional financial dis-closures about valuation and loss reserve accounts. At the same time, theFASB was working on two standards to limit a firm’s ability to take a ‘‘bigbath,’’ SFAS 144 and SFAS 146. We hypothesize that managers taking aggres-sive accounting positions have incentives to lobby against both the SEC- andFASB-proposed rule changes.

The SEC contended that improper revenue recognition is one of the largestissues involved in the restatement of financial statements.5 To this end, the con-troversial SAB 101 limited firms’ revenue recognition choices.6 Companieswere originally required to report the cumulative effect of complying withthe new revenue recognition requirements as a change in accounting principleno later than the first fiscal quarter of the fiscal year beginning after December15, 1999. However, the SEC deferred implementation of SAB 101 twice at therequest of groups claiming that SAB 101 is not a clarification of existing gen-erally accepted accounting principles (GAAP), but is a change in accountingrules.7 We expect that firms whose revenue recognition policies changed dueto SAB 101 have incentives to lobby against accounting regulation.8

5 Nelson et al. (2003) analyze 515 earnings management attempts and document that 114 or 22%were related to revenue recognition.

6 In SAB 101, the SEC staff provides a series of examples of aggressive revenue recognitionpolicies that they have encountered in the past with definitive guidance about their accountingtreatment. For example, non-refundable up front fees that are not discrete earnings events (such astelecommunications activation fees or health club initiation fees) should be deferred and recognizedover the expected period of performance.

7 See, e.g., the joint letter from the Financial Executives Institute and the Institute ofManagement Accountants dated March 2, 2000 which can be found at www.fei.org/download/FEI-IMALetterSAB101.doc.

8 Altamuro et al. (2005) identified a sample of firms that restated their earnings due to SAB 101and found that restating firms were less likely to report small negative earnings than a sample ofcontrol firms, and were more likely to report small positive earnings, suggesting earningsmanagement to avoid losses.

http://www.fei.org/download/FEI-IMALetterSAB101.doc

http://www.fei.org/download/FEI-IMALetterSAB101.doc


Finally, several proposed accounting rules address earnings managementrelated to expense recognition.9 SAB 100 limits the ability to take a ‘‘big bath’’by recognizing liabilities associated with a major event, such as a restructuring,or through the impairment of a long-lived asset.10 Moreover, SFAS 144 andSFAS 146 clarify the accounting related to impairment charges, restructuringsand discontinued operations. Specifically, these two standards reduce the abil-ity to take a big bath by not allowing the accrual of future losses related to dis-continued operations, and by prohibiting recognition of liabilities associatedwith exit activities, such as employee termination benefits and costs to consol-idate facilities and relocate employees, until the liability is incurred.11 Wehypothesize that companies planning to take significant write-offs due torestructuring activities or asset impairments have incentives to lobby againstaccounting regulation.

2.2.2. Business combinations

Two controversial FASB standards under deliberation in 1999 and 2000were SFAS 141, accounting for business combinations, and SFAS 142,accounting for goodwill and other intangible assets. SFAS 141 specifies thatall business combinations initiated after June 30, 2001 are to be accountedfor using the purchase method, while SFAS 142 changes the accounting forgoodwill and other intangible assets. Before SFAS 141, companies accountedfor a business combination as either a purchase or a pooling, depending onthe economics of the transaction. Firms have an incentive to account for abusiness combination as a pooling because the excess of the purchase price overthe fair value of the net assets acquired is not recognized, leading to higherfuture earnings and lower net assets for the combined entity in most cases.Prior research has shown that managers are willing to pay more for the abilityto account for a business combination as a pooling instead of a purchase(Ayers et al., 2002; Robinson and Shane, 1990), that CEOs with earnings-based

9 Nelson et al. (2003) find that 269 of the earnings management attempts in their sample (52%)were related to expense recognition. Francis et al. (1996) analyze different types of write-offs andfind that managerial incentives to manipulate earnings play no role in determining inventory andproperty, plant and equipment write-offs, but are related to more discretionary items such asgoodwill write-offs and restructuring charges.10 In SAB 100, the SEC staff outlines specific criteria that must be met to create a liability related

to restructuring charges, such as an exit plan with specific details and action steps that is approvedby the appropriate level of authority.11 SFAS 144 supercedes SFAS 121 and provides one consistent set of rules for assets that are

either impaired or are to be sold. It limits impairment losses to only those circumstances where thecarrying amount of the impaired asset is not recoverable. SFAS 146 addresses the accounting forcosts associated with exit or disposal activities (including a restructuring program) such astermination benefits to employees. SFAS 146 requires that all liabilities associated with exitactivities be recognized when the liability is incurred, not when the company commits to an exitplan.


compensation contracts are more likely to structure a transaction as a poolingof interests to avoid the lower earnings associated with the purchase method(Aboody et al., 2000), and that analysts’ stock price judgments are lower whena company uses the purchase method of accounting (Hopkins et al., 2000).

The proposed change to the accounting for business combinations, as wellas the final rule (SFAS 141) eliminates the option to account for the transactionusing the pooling method. Since prior empirical evidence suggests that manag-ers have incentives to structure a business combination so it is accounted forusing the pooling method, we hypothesize that managers who are planningon acquiring or merging with other firms have incentives to lobby againstthe FASB’s proposed rule to eliminate the pooling method.

2.2.3. Reflection of liabilities on the balance sheet

Both the SEC and the FASB deliberated on accounting rules that wouldmake the reporting of liabilities on the balance sheet more transparent. Forexample, SFAS 150 describes situations where certain financial instrumentsmust be reported as a liability. Moreover, SFAS 140 outlines when transfersof financial assets can be considered a sale versus a secured borrowing andwhen debt can be considered extinguished.12 Finally, in March 1999, theSEC proposed a codification of the existing guidance on disclosures that mustbe made by parent companies and subsidiaries that guarantee each others’debt. We expect that firms with very high leverage have incentives to lobbyagainst accounting standards that require recording additional liabilities ormaking off-balance sheet liabilities more transparent.

3. Research design, sample selection and descriptive statistics

As discussed in Section 2, managers can attempt to influence the accountingstandard setting process by lobbying the SEC or Congress. Under the Lobby-ing Disclosure Act (LDA) of 1995, firms must file semi-annual lobbying reportswhich include, among other information, total expenditures for lobbying activ-ities during the period.13 The LDA defines lobbying activities as any commu-nication to a covered executive or legislative branch official concerning theformulation, modification, or adoption of Federal legislation, policies or pro-grams. Covered legislative branch officials include any Member of Congressand their employees. Covered executive branch officials include anyone serving

12 Under SFAS 140, a sale of receivables (and other transfers of financial assets) is recognized onlyif control over the transferred assets is surrendered. Otherwise, the sale is accounted for as a securedborrowing.13 In accordance with the LDA, the lobbying reports are available free to the public on the Office

of Public Records website: http://sopr.senate.gov.

http://sopr.senate.gov


under the Executive Schedule and any Schedule C appointments. At the time ofthis study, this included the SEC Commissioners as well as specific employeesin the divisions of the SEC.14 Lobbying activities include planning activities,research, and other background work that is intended to facilitate the commu-nication with these officials.15 Since a firm’s lobbying expenditures under theLDA consists of those related to accounting issues and non-accounting issues,we develop a model that include variables capturing both accounting and otherincentives to lobby. Section 3.1 discusses the selection of our dependent vari-able, our independent variables of interest, and our control variables. Section3.2 presents the empirical model. We summarize our sample selection processand report descriptive statistics in Section 3.3.

3.1. Model variables

3.1.1. Measurement of dependent variable: lobbying expenditures

We obtain annual lobbying expenditures (LOB_EXP), as defined by theLDA, from the Center for Responsive Politics, a non-partisan, non-profitresearch group that tracks money in politics, collects annual lobbying expendi-ture information for all organizations from lobbying reports, and publishes thedatabase on its website – http://www.opensecrets.org. We use the naturallogarithm of lobbying expenditures (deflated by lagged assets) since theseexpenditures do not exhibit the properties underlying a normal distribution.However, our inferences are not materially altered if we do not take the naturallog.

3.1.2. Accounting incentives to lobby

The first major accounting issue during 1999 and 2000 was the action plandeveloped by the SEC to minimize earnings management. We construct multi-ple proxies to capture firms’ incentives to lobby against the SEC and FASBproposals. To begin, we measure a firm’s overall propensity to manage earn-ings by creating a variable that measures the extent of income-increasingaccounting choices made by the firm (ACC_SCORE). Following Bowenet al. (1995, pp. 265–266), we classify a firm’s depreciation and inventory meth-ods used during the year as income-increasing or income-decreasing. Specifi-cally, firms using FIFO, LIFO, or average cost receive an inventory score of1, 0, or 0.50, respectively. Firms using straight-line depreciation, an accelerated

14 Executive Schedule and Schedule C positions are identified in the Plum Book, which ispublished after each presidential election. A copy of the Plum Book can be found at http://www.gpoaccess.gov/plumbook/about.html.15 It is important to note that the LDA definition of lobbying expenditures excludes costs related

to grassroots campaigns, Congressional testimony, and campaign contributions. As such, thelobbying costs reported under the LDA may be understated.

http://www.opensecrets.org

http://www.gpoaccess.gov/plumbook/about.html

http://www.gpoaccess.gov/plumbook/about.html


depreciation method, or a combination of both receive a depreciation score of1, 0, or 0.50, respectively. ACC_SCORE is the sum of the inventory and depre-ciation scores and, therefore, ranges from 0 to 2. If firms using aggressiveaccounting methods to improve profitability lobby more in an effort to create(or maintain) flexible accounting rules, then ACC_SCORE will be positivelyassociated with LOB_EXP.

As a more direct test of firms’ incentives to lobby for earnings managementreasons, we also identify two variables that are specifically related to theaccounting rules under consideration during 1999 and 2000. First, SAB 101addressed improper revenue recognition. Companies are not required to restateprior period financial statements, but must report the cumulative effect of com-plying with the new revenue recognition requirements as a change in account-ing principle no later than the fourth fiscal quarter of the fiscal year beginningafter December 15, 1999. For calendar year firms, this would be the fourthquarter of 1999. To capture a firm’s motivation to lobby against SAB 101,we use the absolute value of the cumulative effect of accounting changes,deflated by beginning of the period total assets (ACCT_CHG).16 We expectthe coefficient on ACCT_CHG to be positive.

Second, SAB 100, SFAS 144 and SFAS 146 limit a company’s ability to takea ‘‘big bath’’ through restructuring plans, asset impairments, or discontinuedoperations. When a firm recognizes restructuring and impairment charges, itis specifically identified by Compustat as a special item. Special items as definedby Compustat have been used in previous studies investigating write-offs andearnings management using a ‘‘big bath’’ strategy (Elliott and Hanna, 1996;Elliott and Shaw, 1988). To capture a firm’s motivation to lobby againstSAB 100, SFAS 144 and SFAS 146, we use the absolute value of total specialitems, deflated by beginning of the period total assets (SPECIAL).17 Wehypothesize that the coefficient on SPECIAL will be positive.

The second major accounting issue during our sample period (1999–2000)was the FASB project on business combinations (SFAS 141). Firms thatacquired other firms during the sample period had an incentive to lobby onSFAS 141. Therefore, we include in our model the effect of any acquisitionson the sales of the acquiring firm, deflated by beginning of the period total

16 We also do a keyword search on Lexis Nexis and develop a list of firms that reported anaccounting change related to SAB 101. Based on this we create an indicator variable that is equal to1 if the firm is on this list, 0 otherwise. Using this alternative variable does not alter the tenor of theresults that follow.17 The majority of special items related to restructuring and impairment charges should be

negative; however, if a firm over-accrues a restructuring liability and then reverses it into incomethe following year, the special item will be positive. Therefore, we include all special items. As asensitivity test, we re-define SPECIAL as income-decreasing special items only and the resultsremain unchanged.


assets (ACQ_SALES). This variable captures the effect of either a purchase orpooling of interest acquisition in the current year on a company’s sales for theprior year. We hypothesize that the more material the acquisition(s), thegreater the acquiring firm’s incentive to lobby on SFAS 141; therefore, weexpect the coefficient on ACQ_SALES to be positive.

The third major accounting issue during our sample period (1999–2000) wasproposals of accounting rules that would make the reporting of liabilities onthe balance sheet more transparent. We expect that firms with very highleverage have incentives to lobby against accounting standards that requirerecording additional liabilities or making off-balance sheet liabilities moretransparent. We measure leverage as total debt divided by total commonequity (DE) and we expect this to be positively related to lobbying expendi-tures.

In summary, we identify five variables related to accounting incentives tolobby during the period 1999–2000. It is important to note that these variablesare intended to capture accounting choices, and are related to the types of busi-ness activities the firm engages in. Although we include a robust set of controlvariables in our model, as discussed below, the accounting variables may notbe independent of business activities not captured by the variables in ourmodel.

3.1.3. Other incentives to lobbyA firm’s political objectives include maintaining laws and regulations

favorable to the firm’s day-to-day operations and long-term goals, such asregulations on waste disposal, hiring practices, occupational safety and prod-uct design (Baysinger, 1984). Corporations also pursue political objectivesdesigned for the company to benefit at the expense of other companies (alsotermed rent seeking) (Baysinger, 1984). Most previous research focuses on rentseeking activities. For example, Dean et al. (1998) find a negative relationbetween corporate political action committee (PAC) contributions and theentry of new firms into an industry, indicating the use of political influenceto create barriers to entry.18 These are more likely to affect capital intensivefirms. In addition, maintaining legislation favorable to current business prac-tices is often more important for capital intensive firms that are impacted byregulations on waste disposal, occupational safety, and product design. Thus,we include capital intensity in our model, defined as total property, plant andequipment divided by total assets (CAP_INT). We expect CAP_INT to be pos-itively related to lobbying expenditures.

18 Examples of regulations creating barriers to entry include grandfather clauses in environmentalstatutes placing less stringent standards on old plants or exclusions of certain types of firms fromoperating in an industry.


Another rent seeking activity relates to obtaining favorable tax laws. Forinstance, Freed and Swenson (1995) find a positive relationship between cam-paign contributions and company specific expected tax benefits from the 1981and 1986 US tax reform acts. Moreover, in its discussion of lobbying activities,the Center for Responsive Politics reports that matters relating to the tax codewere hot-button issues during our sample period (1999–2000). To control fortax-related lobbying expenditures, we include total taxes, deflated by beginningof the period total assets (TAXES). If firms with higher tax burdens tend tolobby more on tax-related issues, then TAXES will be positively associatedwith lobbying expenditures.

The Center for Responsive Politics also reports that matters relating tocopyrights/patents were hot-button issues during our sample period (1999–2000). We include research and development costs, deflated by beginning ofthe period total assets (R&D) since firms with higher research and developmentcosts may lobby more on issues relating to copyright and patents in an effort toprotect their investments. This suggests that R&D may be positively associatedwith lobbying costs. However, Morck et al. (2001) document a negative rela-tion between research and development costs and lobbying activity. They(2001, p. 371) argue that this negative association exists because innovativefirms are ‘‘. . .more likely to have investment opportunities with returns higherthan lobbying returns.’’ As a result, we do not make a prediction regarding thesign of the R&D coefficient.

Firms also lobby for protection against foreign competition (Morck et al.,2001; Lenway et al., 1996; Schuler, 1996; Grier et al., 1994). Grier et al.(1994) find that campaign contributions are higher in industries where thereare adverse market conditions, indicated by the standard deviation of industryprofits and the industry exposure to foreign competition. In addition, priorresearch has shown that US steel firms lobby for import relief when the levelof domestic demand has fallen (Schuler, 1996) and that US steel firms lobbyingfor import relief tend to be larger, less profitable and less innovative (Lenwayet al., 1996). To capture the propensity of firms to lobby for import relief whenthey are losing sales, either through a decline in domestic demand or throughtheir own bad business practices, we include sales growth (SG) in the model.Firms with a declining sales growth are likely to lobby for import and otherprotection. On the other hand, firms that are growing are also likely to lobbyfor regulations to maintain their growth. For example, growing firms in thecommunications industry that are poised to benefit from deregulation maybe active lobbyers. Therefore, we make no prediction regarding the coefficientsign on SG.

There are often industry specific reasons to lobby, such as the cigaretteindustry’s position on the health hazard of cigarettes, the chemical industry’sopposition to the Superfund Act of 1980, and the steel industry’s lobbyingfor protection from foreign competition. If the firms in an industry have a


common goal, then they are more likely to join together to lobby for a specificreason. Moreover, firms are more likely to engage in political activity if theyare in a heavily regulated industry (Lenway and Rehbein, 1991). Therefore,we include industry indicator variables (at the two-digit SIC level) in ourmodel.19

Finally, investing in political strategies is different from other firm invest-ments because the benefits accrue not only to the firm incurring lobbying costsbut also ‘‘spill over’’ to other firms (also referred to as the collective actionproblem or the free-rider problem). Lenway and Rehbein (1991) provide someevidence that organizational slack or a cushion of excess resources influencesthe decision to lobby. In addition, several papers hypothesize that the free-rider problem should be lower for firms in highly concentrated industriesdue to the ability to agree on a collective course of political action. The empir-ical evidence on this is mixed, and Grier et al. (1991) argue that this is becausefirms in concentrated industries are better able to agree on an economic courseof action and therefore do not need government intervention. Finally, thefree-rider problem is less important for larger firms since they can expectgreater benefits from political activity. To this end, studies consistently findthat larger firms are more likely to engage in political activity (Lenway andRehbein, 1991). In addition, firm size is often used as a proxy for a firm’soverall exposure to political scrutiny (Watts and Zimmerman, 1978). To con-trol for firm size, we include the natural logarithm of the market value ofequity (SIZE).

3.2. Empirical model

We combine the variables that capture both accounting and other incentivesto lobby into the following empirical model. We also include as an independentvariable the previous years’ lobbying expenditures, since Morck et al. (2001)document a strong positive association between current and past lobbyingbehavior. Finally, we include year indicator variables to capture any omittedyear-effects. To mitigate heteroskedasticity, as well as coefficient bias resultingfrom scale effects, we deflate all variables, except the SIZE, debt-to-equity, salesgrowth, and year and industry indicator variables, by year t � 1 assets. Specif-ically, we estimate the following model in pooled cross-section using ordinaryleast squares (OLS):

19 We also create an indicator variable that assumes the value of 1 if a firm was in a regulatedindustry, and 0 otherwise. Following Masters and Keim (1985), we define regulated industries astelephone, electricity, gas, railroad transportation, air transportation, trucking, water transporta-tion, and radio and television. The results remain qualitatively the same when we include thisvariable.


LOB EXPit ¼ a0 þ a1 ACC SCOREit þ a2 ACCT CHGit

þ a3 SPECIALit þ a4 ACQ SALESit þ a5 DEit

þ a6 TAXESit þ a7 R&Dit þ a8 CAP INTit þ a9 SGit

þ a10 SIZEit þ a11 LOB EXPit�1 þ a12 MILLSit�1

þXY�1

y¼1

a13y YRyit þXJ�1

j¼1

a14j INDjit þ eit ð1Þ

i, t denote firm and year, respectively. The variables in Eq. (1) are defined asfollows: LOB_EXP natural log of total lobbying expenditures deflated bybeginning of the year total assets; ACC_SCORE = a variable measuring theextent of income-increasing accounting choices by the firm, deflated by begin-ning of the year total assets; ACCT_CHG = the absolute value of the cumula-tive effect of accounting changes on net income, deflated by beginning of theyear total assets; SPECIAL = the absolute value of total special items, deflatedby beginning of the year total assets; ACQ_SALES = the dollar value effect ofacquisitions on the sales of the acquiring firm, deflated by beginning of the yeartotal assets; DE = debt-to-equity ratio; TAXES = total taxes, deflated bybeginning of the year total assets; R&D = research and development expendi-tures, deflated by beginning of the year total assets; CAP_INT = total prop-erty, plant and equipment, deflated by beginning of the year total assets;SG = the percentage change in net sales from year t � 1 to year t; SIZE = thenatural logarithm of the market value of equity; MILLS = the inverse Mill’sratio from Eq. (1a); YRy = a dichotomous variable that equals 1 if the obser-vation is from year y, 0 otherwise; INDj = a dichotomous variable that equals1 if the observation operates in industry j (as defined by two-digit SIC code), 0otherwise.

Managers will only engage in political activity when the benefits of polit-ical activity outweigh the costs. When the costs of political activity are toohigh, for example when the free-rider problem cannot be solved, managerswill not allocate any resources to lobbying. This results in a number of firmswith zero lobbying expenditures. Including these firms in the sample resultsin a large probability mass at a single point and may lead to biased andinconsistent OLS estimates (Grier et al., 1994). However, Grier et al.(1994) note that excluding non-lobbyers may introduce self-selection bias intothe model. Thus, following Grier et al. (1994), we estimate Eq. (1) only onfirms with non-zero lobbying expenditures, and then employ the Heckmantwo-stage procedure to correct for potential self-selection bias (Greene,1997, p. 978).

In the first stage of the Heckman procedure, we estimate the followingequation:


LOB DECit ¼ b0 þ b1 ACC SCOREit þ b2 ACCT CHGit

þ b3 SPECIALit þ b4 ACQ SALESit þ b5 DEit

þ b6 TAXESit þ b7 R&Dit þ b8 CAP INTit

þ b9 SGit þ b10 SIZEit þXY�1

y¼1

b11y YRyit

þXJ�1

j¼1

b12j INDjit þ mit ð1aÞ

LOB_DEC = a dichotomous variable that equals 1 if the firm incurs lobbyingexpenditures during the year, 0 otherwise.

All other variables are as previously defined. Consistent with Grier et al.(1994), this first-stage regression includes all of the variables that we believeare related to the level of lobbying expenditures, except for the lagged levelof lobbying costs. We estimate Eq. (1a) as a probit model and use the resultsof this estimation to form a new variable that captures the self-selection bias.Specifically, we obtain the fitted value of the regression index function (kit),which is the probability of being a lobbyer based on the estimated coefficientsfrom Eq. (1a). We then calculate the inverse Mill’s ratio (MILLS) for lobbyersas /(kit)/U(kit), where / is the standard normal density function and U is thestandard normal cumulative distribution function. We include MILLS as anadditional control variable in Eq. (1) to correct for potential self-selection bias.

3.3. Sample and descriptive statistics

Our sample selection process consists of three phases. First, we obtain firms’lobbying expenditures from the Center for Responsive Politics website – http://www.opensecrets.org. We download lobbying expenditures from 1998 through2000 for all observations in the database and then filter out non-publicly-traded companies. The necessary lobbying data to estimate Eq. (1) for 1999and 2000 is available for 1398 observations representing 750 publicly-tradedfirms. Second, we obtain from COMPUSTAT the remaining firm-specificfinancial data that is necessary to estimate Eq. (1). Of the 1398 observations,590 (390 firms) have the required financial data. Finally, to estimate Eq.(1a), we obtain the necessary data for a sample of non-lobbyers. The non-lob-bying sub-sample consists of all firms in COMPUSTAT that operated in thesame industries as our lobbyers (as defined by 4-digit SIC code) in the sameyear, and have the financial data required to estimate Eq. (1a). The necessarydata is available for 3500 non-lobbying observations (2115 firms).

Table 3 reports the frequency distribution of the sample observations by2-digit SIC code. Most notably, the Chemicals and Instruments industries



Table 3Frequency distribution of observations (by two-digit SIC codes)

SIC code and industry Lobbying observations Non-lobbying observations

Number ofobservations

% ofobservations

Averagelobbyingexpenditure

Number ofobservations

% ofobservations

2800: Chemicals 73 12.37 $968,450 571 16.313800: Instruments 47 7.97 $501,710 456 13.033500: Industrial

equipment36 6.10 $241,820 457 13.06

4800: Communications 33 5.59 $680,340 38 1.093600: Electronics 28 4.75 $709,340 597 17.066300: Insurance carriers 27 4.58 $779,820 0 0.007300: Business services 27 4.58 $370,940 872 24.912000: Food products 26 4.41 $415,100 31 0.893300: Primary metals 24 4.07 $500,890 30 0.863700: Transportation

equipment21 3.56 $3,320,870 67 1.91

44 other 2-digitSIC codes

248 42.02 $451,450 381 10.88

Total 590 100.00 N/A 3500 100.00


contain the largest proportions of the lobbying observations. However, onaverage, lobbying firms operating in the Transportation Equipment industryspent the greatest amount on lobbying activities in 1999 and 2000 (an averageof $3.3 million per firm per year). The majority of the non-lobbying observa-tions operate in the Business Services, Electronics, and Chemicals industries(approximately 58%).

Table 4 displays descriptive statistics for lobbying expenditures and theindependent variables. For comparison purposes, we present descriptive statis-tics for the lobbying and non-lobbying sub-samples separately. Table 4 reportsthat the mean (median) lobbying expenditure is $650,000 ($140,000). More-over, Table 4 reveals that lobbying firms are larger than non-lobbying firmsin terms of market value (MV). After controlling for size by scaling the vari-ables by beginning of the year total assets, Table 4 also shows that the meanvalues for accounting changes, special items, the effect of acquisitions on sales,and R&D costs are lower for lobbying firms relative to non-lobbying firms. Incontrast, lobbyers have higher capital intensity, on average, than non-lobbyers.Panels A and B of Table 5 presents Pearson correlations among the indepen-dent variables for lobbyers and non-lobbyers, respectively. For both lobbyingand non-lobbying firms, the extent of income increasing accounting choices ispositively correlated with R&D expenditures, and negatively correlated withthe amount spent on taxes and the size of the firm. In addition, for lobbyingfirms only, the extent of income increasing accounting choices is positively

Table 4Descriptive statistics

Variable Lobbying observations (N = 590) Non-lobbying observations(N = 3500)

Mean Median Std. dev. Mean Median Std. dev.

LOB_EXP $0.650 $0.140 1.503 N/A N/A N/ASIZE $15,510.36** $2047.88�� $48,621.68 $1293.86 $98.86 $8475.02ACC_SCORE 1.250** 1.000�� 0.551 1.520 1.500 0.505ACCT_CHG 0.001** 0.000 0.011 0.003 0.000 0.034SPECIAL 0.027** 0.005�� 0.079 0.104 0.000 0.935ACQ_SALES 0.043** 0.000 0.185 0.082 0.000 0.755DE 1.710 1.530�� 11.637 0.940 0.400 13.705TAXES 0.028** 0.019�� 0.046 0.020 0.001 0.107R&D 0.039** 0.003�� 0.087 0.288 0.133 0.701CAP_INT 0.720** 0.555�� 1.559 0.486 0.353 0.778SG 0.270** 0.080�� 1.954 1.626 0.161 21.508

Variables are defined as follows: LOB_EXP = total lobbying expenditures, in millions of dollars(we use the natural logarithm in the regression model); SIZE = total market value of equity, inmillions of dollars (we use the natural logarithm in the correlation matrices and the regressionmodel); ACC_SCORE = a variable measuring the extent of income-increasing accounting choicesby the firm (deflated by beginning of the year total assets in the correlation matrices and theregression model); ACCT_CHG = the absolute value of the cumulative effect of accountingchanges on net income, deflated by beginning of the year total assets; SPECIAL = the absolutevalue of total special items, deflated by beginning of the year total assets; ACQ_SALES = thedollar value effect of acquisitions on the sales of the acquiring firm, deflated by beginning ofthe year total assets; DE = debt-to-equity ratio; TAXES = total taxes, deflated by beginning of theyear total assets; R&D = research and development expenditures, deflated by beginning of the yeartotal assets; CAP_INT = total property, plant and equipment, deflated by beginning of the yeartotal assets; SG = the percentage change in net sales from year t � 1 to year t.**,* Significantly different from the non-lobbying sample at the 1% level and 5% level, respectively,using a difference-of-means t-test.��, � Significantly different from the non-lobbying sample at the 1% level and 5% level, respectively,using a Wilcoxon two-sample test (with normal approximation).


correlated with the reporting of special items and negatively correlated with theproportion of debt financing.

4. Results

Table 6 presents the results from the probit estimation of Eq. (1a), whichexamines the determinants of the firm-level decision to incur lobbying expendi-tures in a given year. The likelihood ratio index, an analog to the R2 in an OLSregression, is 0.47, and the model correctly classifies 91.2% of the observations.To assess the economic significance of each independent variable, we computethe effect of a change in each independent variable on the probability of

able 5earson correlations among the independent variables

ACC_SCORE ACCT_CHG SPECIAL ACQ_SALES DE TAXES R&D CAP_INT SG SIZE

anel A: Lobbying observations (N = 590)

CC_SCORE 1.000CCT_CHG 0.021 1.000PECIAL 0.145** �0.010 1.000CQ_SALES �0.032 �0.017 0.006 1.000E �0.091* �0.031 �0.066 �0.023 1.000AXES �0.107** �0.041 0.150** 0.073 �0.009 1.000&D 0.233** 0.269** 0.068 0.010 �0.060 0.078 1.000AP_INT �0.013 0.002 0.468** 0.024 �0.006 �0.023 �0.064 1.000G �0.012 0.045 0.005 0.043 0.003 �0.004 0.050 0.016 1.000IZE �0.341** �0.029 �0.029 0.048 0.051 0.412** 0.048 0.028 �0.018 1.000

anel B: Non-lobbying observations (N = 3500)

CC_SCORE 1.000CCT_CHG �0.006 1.000PECIAL �0.005 0.007 1.000CQ_SALES �0.006 �0.006 0.011 1.000E �0.010 �0.010 �0.005 �0.046** 1.000AXES �0.068** �0.015 �0.033 �0.001 �0.006 1.000&D 0.229** 0.033* 0.138** 0.047** �0.018 �0.060** 1.000AP_INT 0.141 �0.001 0.032 0.051** 0.011 �0.028 0.546** 1.000G 0.005 �0.005 0.013 0.030 �0.010 �0.012 0.080** 0.037* 1.000IZE �0.156** 0.002 0.019 0.015 �0.013 0.185** 0.058** 0.043* 0.033 1.000

ariables are defined in Table 4.*, * Correlation is significantly different from zero at the 1% and 5% levels, respectively.

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Table 6Determinants of firm-level decision to incur lobbying expenditures (Eq. (1a))

LOB DECit ¼ b0 þ b1 ACC SCOREit þ b2 ACCT CHGit þ b3 SPECIALit

þ b4 ACQ SALESit þ b5 DEit þ b6 TAXESit þ b7 R&Dit þ b8 CAP INTit

þ b9 SGit þ b10 SIZEit þXY�1

y¼1

b11y YRyit þXJ�1

j¼1

b12j INDjit þ mit

Variable Prediction Coefficient v2-statistic Mean effect on probabilityof lobbying (%)

ACC_SCORE + �2.335** 8.12 �0.306ACCT_CHG + 0.122 0.01 0.002SPECIAL + �0.090 0.11 �0.036ACQ_SALES + �0.210 1.59 �0.131DE + �0.008* 5.86 �0.197TAXES + �1.683** 6.91 �0.674R&D ? �2.888** 67.39 �1.740CAP_INT + 0.199* 5.29 2.072SG ? �0.023 1.46 �0.097SIZE ? 0.270** 227.66 28.676N 4090Likelihood ratio index 0.47Percent concordant 91.2

Shown are the results of a probit regression, where the dependent variable (LOB_DEC) is adichotomous variable that equals 1 if the firm incurs lobbying expenditures during the year, 0otherwise. The independent variables consist of a variable measuring the extent of income-increasing accounting choices by the firm (ACC_SCORE), the absolute value of the cumulativeeffect of accounting changes on net income (ACCT_CHG), the absolute value of total special items(SPECIAL), the dollar value effect of acquisitions on the sales of the acquiring firm (ACQ_SALES), the debt-to-equity ratio (DE), total taxes (TAXES), research and development expendi-tures (R&D), total property, plant and equipment (CAP_INT), the percentage change in net salesfrom year t � 1 to year t (SG), and the natural logarithm of the market value of equity (SIZE).Included in the regression, but not reported for brevity’s sake, are indicator variables controllingfor year and industry at the two-digit SIC code level. All variables, except the size, debt-to-equity,sales growth, and year and industry indicator variables are deflated by year t � 1 assets. Of the 4090observations, 590 are lobbyers. The sample period is 1999–2000.**, * Coefficient is significantly different from zero at the 1% and 5% levels, respectively.


undertaking lobbying activities, holding the other variables constant and eval-uated at the sample mean. We report this in the far right column of Table 6.

With respect to accounting incentives to lobby, Table 6 shows that a firm’saccrual score and debt-to-equity ratio are negatively associated with the prob-ability that it will engage in any lobbying activity. Although these results arecontrary to our expectations developed with respect to the level of lobbyingexpenditures, the coefficients on these two variables are economically unimpor-tant; in particular, both the accrual score and debt-to-equity ratio for an aver-age firm decease the probability that the firm will lobby by less than 1%


(�0.306% and �0.197%, respectively). Moreover, the lower probability of lob-bying for firms with high debt-to-equity ratios is consistent with argumentsmade by Lenway and Rehbein (1991) that firms with high debt to equity ratioshave low financial flexibility and are more likely to be ‘‘free riders.’’ Overall,accounting incentives to lobby explain very little of the decision to expendresources on lobbying.

Regarding other incentives to lobby, Table 6 shows that the higher a firm’staxes and research and development expenditures, the less apt it is to invest inlobbying activities. The latter result is consistent with the findings of Morcket al. (2001), who argue that innovative firms (as measured by R&D costs)are likely to have more profitable projects to invest in than lobbying activities.Finally, Table 6 shows that larger firms and more capital intensive firms aremore likely to engage in lobbying. Moreover, SIZE is economically the mostimportant variable in Eq. (1a). Specifically, the size of an average firm in oursample increases the probability that the firm will lobby by 28.67%. Overall,non-accounting incentives to lobby explain most of the decision to expendresources on lobbying, with size having the largest effect on the probability thata firm will lobby followed by capital intensity and R&D expenditures. As pre-viously discussed, we include the inverse Mills ratios for the lobbyers from Eq.(1a) as a control variable in Eq. (1) to correct for potential self-selection bias.

Table 7 presents the results from the selectivity-bias-corrected OLS estima-tion of Eq. (1).20 To ensure that the results are not driven by a small numberof influential observations, we remove 11 outliers and estimate the model usingthe remaining 579 observations of firms with lobbying expenditures.21 Consis-tent with expectations, we find that the greater the extent of income-increasingaccounting choices made by the firm, the higher its lobbying expenditures (coef-ficient on ACC_SCORE = 3.536, t = 2.50). One possible reason for this positiveassociation is that firms using aggressive accounting methods to improve theirprofitability lobby more in an effort to create (or maintain) flexible generallyaccepted accounting principles. In addition, Table 7 reveals that ACCT_CHGis positively related to lobbying expenditures (t = 2.28), providing some evi-dence that firms affected by SAB 101 may have increased their lobbying activity

20 Included in each equation are 50 industry indicator variables and the coefficients are notreported in the tables for brevity’s sake. The coefficients on four of the industry indicator variableswere positive and significant: metal mining, insurance, insurance holding companies, and businessservices. In addition, the null hypothesis that all industry coefficients are zero is rejected at the 1%level of significance in all equations. All reported t-statistics are based on White (1980) standarderrors.21 In all OLS equations, we control for outliers by deleting observations with an R-student statistic

greater than three in absolute value, and, therefore, the regression results are based on a smallersample than the sample of 590 lobbyers for which descriptive statistics are based on Table 4.However, the descriptive statistics for the sub-samples used in the OLS regressions are virtually thesame as those reported in Table 4.

Table 7Regression of lobbying expenditures on firm exposure to accounting regulatory activity (Eq. (1))

LOB EXPit ¼ a0 þ a1 ACC SCOREit þ a2 ACCT CHGit þ a3 SPECIALit

þ a4 ACQ SALESit þ a5 DEit þ a6 TAXESit þ a7 R&Dit þ a8 CAP INTit

þ a9 SGit þ a10 SIZEit þ a11 LOB EXPit�1 þ a12 MILLSit�1

þXY�1

y¼1

a13y YRyit þXJ�1

j¼1

a14j INDjit þ eit

Variable Prediction Coefficient t-statistic

ACC_SCORE + 3.536** 2.50ACCT_CHG + 5.912* 2.28SPECIAL + �0.709 �1.74ACQ_SALES + 0.510** 3.41DE + �0.001 �0.55TAXES + 0.661 0.87R&D ? �0.001 0.01CAP_INT + 0.028* 2.03SG ? 0.023 1.41SIZE ? �0.017 0.57LOB_EXP + 0.851** 32.05MILLS ? 0.812 1.28N 579Adjusted R2 0.81

Shown are the results of an OLS regression of the natural logarithm of total lobbying expenditures(LOB_EXP) on a variable measuring the extent of income-increasing accounting choices by thefirm (ACC_SCORE), the absolute value of the cumulative effect of accounting changes on netincome (ACCT_CHG), the absolute value of total special items (SPECIAL), the dollar value effectof acquisitions on the sales of the acquiring firm (ACQ_SALES), the debt-to-equity ratio (DE),total taxes (TAXES), research and development expenditures (R&D), total property, plant andequipment (CAP_INT), the percentage change in net sales from year t � 1 to year t (SG), thenatural logarithm of the market value of equity (SIZE), the one-year lagged value of lobbyingexpenditures, and the inverse Mill’s ratio from Eq. (1a) (MILLS). Included in the regression, butnot reported for brevity’s sake, are indicator variables controlling for year and industry at the two-digit SIC code level. All variables, except the size, debt-to-equity, sales growth, and year andindustry indicator variables are deflated by year t � 1 assets. The sample period is 1999–2000.Observations with an R-student statistic greater than three in absolute value have been deleted.t-statistics are based on White (1980) standard errors.**, * Coefficient is significantly different from 0 at the 1% and 5% levels (one-tailed tests forpredicted signs), respectively.


in 1999 and 2000 in an attempt to alter the content of the proposed accountingrule. We find no evidence that firms planning to take significant write-offs due torestructuring activities or asset impairments engaged in a greater level of lobby-ing activity (coefficient on SPECIAL = �0.709, t = �1.74). A potential reasonfor this is that the proposed accounting changes in 1999 and 2000 did notsignificantly alter the impact of SFAS 121, which was implemented in 1995.


Moreover, unreported univariate tests show that SPECIAL is correlated withlobbying expenditures (Pearson correlation = 15%, p > 0.01). Thus, its relationwith lobbying expenditures may be subsumed by the other variables.

Consistent with expectations, we find that ACQ_SALES is positively asso-ciated with lobbying expenditures (t = 3.41), suggesting that firms involved inacquisitions engaged in a higher level of lobbying activity in 1999 and 2000,possibly in an effort to influence the FASB on SFAS 141. We more directlyinvestigate firm lobbying efforts with respect to this accounting issue by obtain-ing copies of all of the comment letters related to this project from the FASB.Examination of these letters reveals that 77 of our 390 sample firms wrote com-ment letters to the FASB on this topic. As an additional test of the associationbetween this accounting issue and lobbying activity, we replace ACQ_SALESwith an indicator variable that equals 1 if the firm wrote a comment letter, and0 otherwise. The results (not reported for parsimony) show that this indicatorvariable is positively related to lobbying expenditures (t = 2.87). Hence, itappears that firms that directly lobbied the FASB on the accounting for busi-ness combinations also have higher lobbying expenditures.

Contrary to expectations, we find no significant association between lever-age and the level of lobbying activity (coefficient on DE = �0.001, t =�0.55). However, as discussed previously, leverage is also a proxy for excessresources or organizational slack, which is associated with the decision tolobby (Lenway and Rehbein, 1991). As such, the lack of significance on theDE variable could be due to conflicting incentives: high debt firms may lobbyto prevent violating debt covenants, but at the same time low debt firms maylobby as they have more organizational slack.

In sum, we find that three of our accounting-related variables (ACC_SCORE, ACCT_CHG, and ACQ_SALES) are significantly related to lobbyingexpenditures, while the other two variables (SPECIAL and DE) are not signif-icantly associated with lobbying outlays. Moreover, an unreported F-testrejects the null hypothesis that the coefficients on all five of the accounting-related independent variables are equal to 0 at the 1% level of significance.Consequently, we provide preliminary evidence that accounting-related issuesexplain a statistically significant portion of firms’ lobbying expenditures.

We also assess the economic significance of accounting-related lobbyingexpenditures. To do this, we first undo the natural logarithm transformationof lobbying expenditures to help us interpret the regression coefficients. Next,we calculate the predicted value of lobbying expenditures for each firm–yearobservation based on the estimated coefficients from the accounting-relatedvariables. After adjusting for the scales on the variables, the predicted valuessuggest that the median accounting-related lobbying expenditure is $11,700,or approximately 8.36% of the median total lobbying expenditure. Hence, itappears that accounting-related lobbying expenditures represent an economi-cally small fraction of total lobbying costs.


Turning to the non-accounting incentives to lobby, Table 7 unexpectedlyshows that the level of tax expense and spending on research and developmentare not significantly associated with the level of lobbying activity. Unreportedcorrelations indicate that R&D and TAXES are positively and significantlycorrelated with both LOB_EXP and the lagged value of LOB_EXP. As such,the associations of R&D and TAXES with LOB_EXP may be subsumed in Eq.(1) because of the inclusion of lagged lobbying expenditures. We verify this byre-estimating Eq. (1) without lagged lobbying expenditures. The results fromthis alternative specification (not reported) reveal that both R&D and TAXESare positively related to LOB_EXP (t = 3.06 and 2.70, respectively). This sug-gests that R&D spending and tax burdens are associated with a firm’s overalllevel of lobbying activity, but not changes in lobbying activity.

In addition, Table 7 reveals that sales growth is not significantly related tolobbying expenditures. The lack of significance on the sales growth variablecould be due to the conflicting incentives of declining sales growth firms tolobby for import and other protection, and growing firms to lobby for regula-tions to assist their growth. Table 7 also shows that capital intensity(CAP_INT) and previous period lobbying expenditures (LOB_EXPt�1) arepositively related to LOB_EXPt (t = 2.03 and 32.05, respectively). The latterresult is consistent with Morck et al. (2001), who document a strong positiveassociation between past and current lobbying activities. Finally, the self-selec-tion bias control variable is not significantly related to the level of lobbyingexpenditures (coefficient on MILLS = 0.812, t = 1.28).

5. Occasional lobbyers versus habitual lobbyers

Previous research finds that not all firms have the same propensity to lobby.Broadly speaking, Morck et al. (2001) conclude that there exist two types oflobbyers: (1) the habitual lobbyer, whose lobbying activity depends primarilyon its lobbying activity from the previous period; and (2) the occasional lob-byer, whose lobbying depends less on past lobbying and more on other firm-specific factors. This is similar to Hillman and Hitt (1999) who argue that firmsgenerally adopt either a long-term, relationship building approach or a trans-actional approach to political strategy. Table 7 shows that firms’ lobbyingexpenditures are associated with incentives to lobby on specific accounting reg-ulation. As a change in an accounting rule is a specific event, we expect thatoccasional lobbyers are more likely to lobby on specific accounting issues. Inaddition, based on Morck et al. (2001), we expect that past lobbying expendi-tures are more important in predicting future lobbying expenditures for habit-ual lobbyers than occasional lobbyers.

We use data on whether or not the firm has an in-house lobbying staff (col-lected from the Center for Responsive Politics website) to differentiate between


occasional and habitual lobbyers. It is likely that firms that have invested indeveloping in-house lobbying staffs are more apt to be habitual lobbyers, inpart because of the fixed costs (e.g., salaries of the legal staff) associated withhaving an in-house lobbying department. In contrast, firms that do not havein-house lobbying staffs are more likely to be occasional lobbyers since theymay only hire external lobbying firms when they need to respond to specificpending regulations.22

We investigate the differences in factors influencing the lobbying activities ofoccasional and habitual lobbyers by estimating the following equation usingOLS:

LOB EXPit ¼ OCCASIONAL � d0 þ d1 ACC SCOREit

h

þd2 ACCT CHGit þ d3 SPECIALit þ d4 ACQ SALESit

þd5 DEit þ d6 TAXESit þ d7 R& Dit þ d8 CAP INTit

þd9 SGit þ d10 SIZEit�1 þ d11 LOB EXPit�1 þX

d12y YRyit

þX

d13i INDjit

iþHABITUAL � k0 þ k1 ACC SCOREit

h

þk2 ACCT CHGit þ k3 SPECIALit þ k4 ACQ SALESit

þk5 DEit þ k6 TAXESit þ k7 R&Dit þ k8 CAP INTit

þk9 SGit þ k10 SIZEit þ k11 LOB EXPit�1 þX

k12y YRyit

þX

k13i INDjit

iþ r1 MILLSþ r2 SEGMENTS þ hit ð2Þ

The variables in Eq. (2) are defined as follows: OCCASIONAL = an indicatorvariable that equals one if the observation does not have an in-house lobbyingstaff, HABITUAL = an indicator variable that equals one if the observationhas an in-house lobbying staff, SEGMENTS = the number of business seg-ments the firm operates in.

All other variables are as previously defined. In addition to the variablesfrom Eq. (1), we also control for factors related to the decision of whetherto be an occasional or habitual lobbyer. Specifically, Hillman and Hitt(1999) propose that firms with related product lines or in a single businessare more likely to use a relational approach to political action (habitual lob-byer). To control for this factor, we include the number of business segments(SEGMENTS) in Eq. (2). Hillman and Hitt (1999) also note that firms in a reg-ulated environment are more apt to be habitual lobbyers. We already include

22 Morck et al. (2001) use an iterative expectation–maximization (EM) algorithm that lets theirsample firms statistically sort themselves into the two groups, occasional and habitual. We choosenot to use this method since we have an indicator variable (i.e., the existence of an in-houselobbying department) that allows us to differentiate occasional lobbyers from habitual lobbyers.


industry indicator variables in the model, which should capture the effect ofbeing in a regulated industry.

Eq. (2) represents the stacking of two regressions: the first where the firm–year observations are classified as occasional lobbyers (i.e., observations with-out in-house lobbying staffs), and the second where the firm–year observationsare classified as habitual lobbyers (i.e., observations with in-house lobbyingstaffs). As such, the d(k) coefficients measure the relation between lobbyingexpenditures and the hypothesized factors for the occasional (habitual) lobb-yers. The stacked regression approach allows us to statistically test the differ-ences in the coefficient estimates across the two lobbying groups.23 Two ofour independent variables (MILLS and SEGMENTS) are control variablesfor the decision to lobby and the decision to be a habitual lobbyer, respectively.Since we are only interested in testing the differences in the coefficients on thevariables that we expect to drive lobbying costs, we do not allow the slope coef-ficients on these two variables to vary across lobbyer type.

Table 8 presents the results from the OLS estimation of Eq. (2). To ensurethat the results are not driven by a small number of influential observations, weremove 17 outliers and estimate the model using the remaining 573 observa-tions. Consistent with our expectations, the tendency to make income-increas-ing accounting choices (ACC_SCORE), and the incentives to lobby on theaccounting for revenue recognition (ACCT_CHG) as well as business combi-nations (ACQ_SALES) are positively associated with lobbying expendituresfor occasional lobbyers only. In addition, the coefficient estimate on ACQ_SALES is significantly different for the two groups of firms (t = 1.85).

We also assess the economic significance of accounting-related lobbyingexpenditures using the estimated coefficients from the accounting-related vari-ables. After adjusting for the scales on the variables, the predicted values sug-gest that accounting-related lobbying for the median occasional lobbyer isapproximately $12,030, or 20.05% of the median lobbying expenditure madeby occasional lobbyers. For habitual lobbyers, the median amount spent onaccounting-related lobbying is $28,806 or 6.86% of the median lobbying expen-diture made by habitual lobbyers. Overall, it appears that accounting-relatedlobbying expenditures represent a statistically significant but economicallysmall fraction of total lobbying costs. In addition, the results suggest thatproposed changes to accounting regulation influences the amount occasional

23 In contrast to an interaction approach, stacking regressions allows us to statistically test thedifferences in the coefficients estimates across the two groups of lobbyers, where the coefficientestimates represent the total (instead of incremental) effect of the independent variable on thedependent variable within each lobbying group. Maddala (1992) provides a discussion of stackedregressions, showing that the main assumption underlying this technique is that the error term fromeach regression has the same distribution. Recent accounting research using stacked regressionsincludes Riedl (2004).

Table 8Analysis of occasional lobbyers versus habitual lobbyers (Eq. (2))

LOB EXPit ¼ OCCASIONAL � d0 þ d1 ACC SCOREit þ d2 ACCT CHGit þ d3 SPECIALit þ d4 ACQ SALESit

h

þ d5 DEit þ d6 TAXESit þ d7 R&Dit þ d8 CAP INTit þ d9 SGit þ d10 SIZEit�1 þ d11LOB EXPit�1

þX

d12y YRyit þX

d13i INDjit

iþHABITUAL � k0 þ k1 ACC SCOREit þ k2 ACCT CHGit

h

þk3 SPECIALit þ k4 ACQ SALESit þ k5 DEit þ k6 TAXESit þ k7 R&Dit þ k8 CAP INTit þ k9 SGit

þk10 SIZEit þ k11 LOB EXPit�1 þX

k12y YRyit þX

k13i INDjit

iþ r1 MILLSþ r2 SEGMENTSþ hit

Variable Predicted coefficient Occasional lobbyers (N = 299) Habitual lobbyers (N = 274) Tests of differences in coefficients acrosslobbyer types

Coefficient (t-statistic) Coefficient (t-statistic) Predicted difference Difference (t-statistic)

ACC_SCORE + 4.359** 3.281 + 1.078(3.30) (1.59) (1.37)

ACCT_CHG + 8.274** �4.502 + 12.776(2.73) (�0.30) (0.82)

SPECIAL + �2.004** �0.017 + �1.987**

(�3.16) (�0.01) (2.78)ACQ_SALES + 0.610* 0.091 + 0.519*

(2.36) (0.76) (1.85)DE + �0.004 0.001 + �0.003

(�0.72) (0.45) (0.68)TAXES + 1.400 �0.189 + 1.589

(1.09) (�0.20) (1.00)R&D ? 0.245 0.430 ? �0.185

(0.46) (0.31) (0.14)

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CAP_INT + �0.159 �0.007 + �0.152(�1.19) (�0.54) (1.14)

SG ? 0.023 0.237** ? �0.214*

(1.50) (2.62) (2.33)SIZE ? �0.082 0.052 ? �0.134**

(�1.68) (1.32) (3.14)LOB_EXP + 0.739** 0.901** � �0.162**

(18.18) (23.81) (2.92)MILLS ? 0.635 N/A N/A

(0.75)SEGMENTS ? �0.005 N/A N/A

(�0.33)

Shown are the results of an OLS regression of the natural logarithm of total lobbying expenditures (LOB_EXP) on a variable measuring the extent ofincome-increasing accounting choices by the firm (ACC_SCORE), the absolute value of the cumulative effect of accounting changes on net income(ACCT_CHG), the absolute value of total special items (SPECIAL), the dollar value effect of acquisitions on the sales of the acquiring firm(ACQ_SALES), the debt-to-equity ratio (DE), total taxes (TAXES), research and development expenditures (R&D), total property, plant andequipment (CAP_INT), the percentage change in net sales from year t � 1 to year t (SG), the natural logarithm of the market value of equity (SIZE),the inverse Mill’s ratio from Eq. (1a) (MILLS), and the number of business segments (SEGMENTS). Included in the regression, but not reported forbrevity’s sake, are indicator variables controlling for year and industry at the two-digit SIC code level. All variables, except the size, debt-to-equity,sales growth, and year and industry indicator variables are deflated by year t � 1 assets. This table reflects the stacking of two regressions: the firstwhere the firm–year observations are classified as occasional lobbyers (i.e., observations without in-house lobbying staffs), and the second where thefirm–year observations are classified as habitual lobbyers (i.e., observations with in-house lobbying staffs). The total sample consists of 573 obser-vations, of which 299 are occasional lobbyers. The sample period is 1999–2000. Observations with an R-student statistic greater than three in absolutevalue have been deleted. t-statistics are based on White (1980) standard errors.**, * Coefficient is significantly different from 0 at the 1% and 5% levels (one-tailed tests for predicted signs), respectively.

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lobbyers spend on lobbying, but has no significant impact on the costs incurredby habitual lobbyers.

Moreover, when the two groups are considered separately, there is a posi-tive association between sales growth and lobbying expenditures and the mag-nitude of the relationship is significantly higher (t = 2.33) for habituallobbyers. Unexpectedly, CAP_INT is not significantly different from zerofor both groups. This may be due to the high correlation between capitalintensity and the existence of an in-house lobbying staff (p = 0.02). Finally,and as expected, the association between past and current lobbying expendi-tures is significantly less for occasional lobbyers than for habitual lobbyers(t = 2.92).

6. Conclusion

This paper investigates how accounting fits into a firm’s overall politicalstrategy. Previous studies on accounting related lobbying focus on examiningcomment letters written to the FASB related to specific accounting standards.We use data on lobbying expenditures for 390 firms during the period 1999–2000 to investigate whether lobbying directly with Congress and the SEC isassociated with incentives to influence accounting standard setting. Based ona review of the FASB’s and SEC’s activities, we identify three significantaccounting issues that were under consideration during this time period. First,in late 1998, the SEC implemented an action plan to make it harder for com-panies to manage earnings. This resulted in two Staff Accounting Bulletins(SABs) geared towards curtailing earnings management: SAB 100 coveringrestructuring and impairment charges and SAB 101 covering revenue recogni-tion. Second, the FASB was deliberating on a new set of standards for businesscombinations. Finally, during this time period, both the SEC and the FASBdeliberated on accounting rules that would make the reporting of liabilitieson the balance sheet more transparent. We develop several proxies to capturethe extent to which firms would be affected by both the FASB and SECaccounting pronouncements under consideration.

The empirical analyses suggest that firms’ lobbying expenditures are signif-icantly associated with their incentives to lobby on accounting related issues. Inparticular, we find that lobbying expenditures are positively associated with afirm’s exposure to changes in the accounting for business combinations andrevenue recognition. However, this association is limited to firms that do nothave in-house lobbying departments (occasional lobbyers). We also find thatoccasional lobbyers that tend to make income-increasing accounting choicesalso have higher lobbying expenditures, possibly in an effort to create (or main-tain) flexible generally accepted accounting principles. The results are robust toa correction for self-selection bias.


In sum, we provide preliminary evidence that accounting-related issuesexplain a statistically significant portion of the expenditures incurred by occa-sional lobbyers. Additional analysis suggests that the median accounting-related lobbying expenditure for all firms is $11,700 or 8.36% of the medianamount spent on lobbying. For occasional lobbyers, the median amount spenton accounting-related lobbying is $12,030 or 20.05% of the median amountspent on lobbying. Thus, accounting-related lobbying expenditures representjust a small portion of total lobbying costs.

This paper contributes to the accounting literature in a couple of ways.First, prior research examines the content of comment letters related to FASBexposure drafts and shows that companies’ responses to the FASB proposalsare related to managers’ self-interests. Taken together, the results of this papershow that lobbying expenditures are associated with both incentives to lobbyon specific accounting proposals (business combinations and revenue recogni-tion) and the overall tendency to make income-increasing accounting choices,suggesting that lobbying activity is associated with ongoing accounting incen-tives as well as highly publicized, controversial accounting rules. In addition, itappears that companies not only send comment letters to the FASB to try toinfluence their deliberations, but also take the much stronger approach of hir-ing lobbyists to exert political influence.

Second, one difficulty in identifying the frequency of earnings managementis that it involves determining at what point management has decided to influ-ence or mislead. The process of accrual accounting tends to smooth cash flows,and it is unclear at what point accrual accounting changes from producingincome that better reflects economic performance to earnings management(Dechow and Skinner, 2000). Over the past decade, researchers have providedsome evidence on the magnitude and frequency of earnings management, spe-cific accruals and accounts used to manage earnings, and management’s incen-tives to manage earnings.24 However, much of this evidence is limited due tosmall sample sizes, a focus on specific, potentially infrequent situations, andlimitations in research design. Recently, there has been a call to take the nextstep in investigating the consequences of accounting choice. One potentialfuture direction is to ‘‘. . .investigate the costs companies are willing to incurto maintain accounting method choice discretion’’ (Fields et al., 2001). Thispaper takes a step in this direction as we focus on a situation where manage-ment has chosen to incur costs and we link this to potential earnings manage-ment activity.25

24 See Healy and Wahlen (1999) and Fields et al. (2001) for a review of this literature.25 While we examine direct lobbying expenditures, they are likely the minimum amount that firms

are willing to spend and are an overall proxy for the propensity to spend money on accountingrelated lobbying. Other related expenditures not captured here are campaign contributions and theopportunity cost of using up a political favor.


Acknowledgments

We would like to thank Wanda Wallace, participants in the Batten Confer-ence at the College of William and Mary, and participants in the AmericanAccounting Association 2005 Southeast Regional Meeting for their helpfulcomments and suggestions.

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how does accounting fit into a firm’s political strategy?

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