Essays on Political Economy and Venture Capital

This thesis consists of three essays focused on political economy and venture capital (VC) markets. The first essay investigates the influence of CEO political contributions on the exit performance of venture capital-backed firms. The second essay examines the role of political homophily between venture capitalists and CEOs in shaping investment decisions and outcomes. The final essay explores how partisan alignment between venture capital firms and the U.S. federal government affects innovation and green innovation outcomes in portfolio companies.

The first empirical essay examines whether CEO political contributions affect the exit performance of venture capital-backed firms. Using comprehensive data and empirical methods, this study finds that such contributions increase the likelihood of favorable exits (IPOs/acquisitions) and reduce liquidation risks. Contributions also accelerate successful exits and delay adverse ones, with more pronounced effects during election years and in highly corrupt states. The results persist regardless of political affiliation. Evidence of political contributions influencing government contract awards suggests potential political favor exchanges. Firm-level political spending corroborates these findings, though CEO contributions are more typical, underscoring the role of human capital in entrepreneurial settings.

The second empirical essay investigates the effects of political homophily between VC partners and company CEOs on investment decisions and outcomes. Using a comprehensive dataset of U.S. VC investments matched with political donation records from 2000 to 2021, this study finds that political similarity increases the likelihood of investment but negatively impacts exit performance, lowering IPO and M&A success rates and delaying exits. These findings support the in-group favoritism explanation. Shared partisanship promotes trust and collaboration but can lead to overconfidence and groupthink that deteriorates exit performance. Alignment with the broader political environment (e.g., the incumbent government or local political preferences) can mitigate these effects by enhancing legitimacy and access to resources. The analysis of investment structure shows that politically aligned VC-CEO pairs favor early-stage, first-round, non-syndicated deals, yet experience slower follow-on financing and longer intervals between rounds. This essay offers novel insights into how ideological alignment influences venture investment behavior and performance with implications for entrepreneurs, investors, and policymakers.

In the last essay, this study investigates whether partisan alignment between VC firms and the U.S. federal government influences innovation and green innovation outcomes in portfolio companies. The findings indicate that VC firms aligned with liberal administrations are associated with significantly greater innovation output and green innovation. Using a difference-in-differences approach around the 2008 and 2016 presidential elections, the analysis provides causal evidence that political alignment increases both patenting and green patenting activity, especially following the election of Obama. Furthermore, potential mechanism analyses suggest that partisan alignment fosters investor optimism, which in turn reduces perceived policy uncertainty (e.g., during periods of elevated economic policy uncertainty, gubernatorial elections, and in swing states), and facilitates access to government resources (e.g., in government-dependent industries and lobbying active firms). These effects are not driven by internal ideological diversity within VC firms or the political alignment of portfolio company CEOs, and remain robust across various additional tests.