It is not often that major research projects begin with daytime television. But this was the case for a series of groundbreaking studies about the relationships between politicians and firms. As a child growing up in Italy, Mara Faccio watched cartoons on the country’s new commercial TV networks. Those networks would soon turn into the media empire that brought Silvio Berlusconi to the public stage and launched his political career. Faccio was fascinated by Berlusconi’s transition from an entertainment mogul into a politician. Watching his electoral success, Faccio began to wonder how his business empire connected to his political career: “I decided to start to look at his case and to investigate the empirical value of political ties.”
This investigation was the starting point for her article, “Politically Connected Firms,” published in the American Economic Review (2006). The scope of the article went well beyond Berlusconi and Italy. Faccio studied 20,000 firms from around the globe to discover the implications of connections between politicians and firms. She found that political connections significantly added to firm value. By looking at firms from 47 different countries in this study, she was also able to draw international comparisons. She found that politically connected firms were especially successful in controlling market share in countries with high levels of corruption: in Russia, for example, politically connected firms controlled 87% of total stock market capitalization as of 2001. While we might expect this in Russian, Faccio also found a surprising number of politically connected firms in more democratic and transparent countries like Britain, which was third after Russia and Thailand for the percentage of market capitalization held by politically connected firms. These finding led Faccio to further questions about how political connectedness works in different national contexts.
Following up on her American Economic Review article (the journal’s most cited article of that year), Faccio has completed two more recent studies about political connectedness, each of them with important political implications. Her cross-country analysis “Political Connections and Corporate Bailouts,” co-authored with Ronald Masulis and John J. McConnell, studied firms across 35 countries between 1997 and 2002. They found that politically connected firms were more likely to be bailed out than similar firms without political connections, especially in countries receiving subsidies from the International Monetary Fund and the World Bank. Their findings reveal both the prevalence of corruption and—building on Faccio’s earlier findings—the ways that this corruption rewards poorer performing firms: among bailed-out firms, those that were politically connected had significantly poorer performance, both at the time of the bailout and following the bailout. In a separate paper, Faccio and co-authors Paul K. Chaney and David C. Parlsey, found that politically connected firms gathered significantly poorer accounting information, concluding that politically connected firms are less subject to market pressure than their non-connected competitors to collect high quality information (“The Quality of Accounting Information in Politically Connected Firms,” 2011).
A subsequent article on private equity, “Politically Connected Private Equity Firms and Employment,” co-authored with Hung-Chia Hsu again addressed a topic ripped from the headlines. Mitt Romney was running for president and Faccio followed the debates that his candidacy sparked over the role of private equity firms like Bain Capital. Faccio and Hsu studied such firms and found that following a buyout, targets of politically connected private equity firms create more jobs than targets of unconnected firms do. The difference is even more pronounced in election years, in places with close races, and in places with high levels of corruption. These findings suggest what Faccio calls “an exchange of favors” between companies and politicians: higher employment bolsters the standing of incumbent politicians, helping them to win reelection, and politicians in turn act favorably toward those companies. At a first glance, increased employment may seem like a win-win. After all, politicians are transparent about celebrating their influence in keeping and creating jobs. But it is more complicated than that. The question, Faccio says, “is what companies get back from the government—are they more likely to win government contracts for example?” As we already know from Faccio’s other work, politically connected firms perform worse in many respects than unconnected ones: the problem is when “our taxes are wasted in providing subsidies to companies that aren’t the best in the market.”
Faccio’s research on politically connected firms represents just one field in which Faccio has published acclaimed papers. A full exploration of her work on taxes, capital structure and allocation, corporate ownership and governance, corporate risk taking, CEO gender, mergers and acquisitions, and pension funds, would take a series of profiles. But her work on political connectedness is typical for Faccio in that she takes a topic of immediate political significance—about which most people no doubt have strong feelings—and offers an empirically sound and analytically nuanced way of understanding them.
Her work on political connectedness is also characteristic for Faccio in that it demonstrates both the international scope of her research and her commitment to understanding financial decisions in relation to culture. Faccio’s work is at the forefront of an expanding field of research in culture and finance. In the introduction to a special issue of the Journal of Corporate Finance
catalyzing this burgeoning field, Faccio and her co-editors reveal what finance has to gain from this innovative and interdisciplinary approach: “Culture influences perceptions, preferences, and behaviors and, therefore, action outcomes by and perceived utilities of the financial decision maker(s). It does so directly by influencing decisions and through institutions by shaping decisions and information costs. Ignoring the role of culture thus risks omitting an important variable from an analysis of financial decision-making.”
Of course, rigorous analysis of financial data in conjunction with attention to culture and a broad international scope presents its own challenges. “Some obvious challenges,” Faccio explains, “are just getting the data, monitoring the quality of the data, and being able to account for differences that vary across countries—issues connected to culture, development, and corruption.” Faccio has developed ways to overcome the challenge of identifying and accounting for these factors, such as focusing first on differences within countries (for example, between politically connected and unconnected firms within one country) before drawing international comparisons.
One testament to the importance and creativity of Mara Faccio’s scholarship is the how widely her work has been cited both within academic journals and in the public press. Multiple articles she has written are among the most cited of their respective journals, and her work has been covered in publications ranging from The Economist, The Nation, and The New York Times to Italia Oggi, the Deutsche Presse-Agentur, and The Hindu BusinessLine. “It is very difficult to know in advance what will be successful and what is not,” she says, but she tells her students that the best starting point is to pick topics that are relevant, “I tell them to read the newspaper, to remain in touch with reality, to see what the big problems are these days.” She also teaches her students to enter projects with a big picture problem instead of a single narrow question: “often we’ll start a project and eventually have to lay it aside, so having a bigger research idea is very important in those cases. If you have a bigger question in mind, then you don’t become discouraged when one topic doesn’t work, you have a long-term interest and can move on to something else.”
Faccio certainly follows her own advice, bringing pressing public questions into her research and maintaining so many long term interests that she is at times working on as many as ten separate journal articles. But still, she remains in touch with reality—and not just by reading the newspaper. She is also an avid athlete, playing golf and soccer when she is not at her desk: “it is nice to be able to have fun in one’s work, but that’s not everything in life. Hopefully!”