83rd International Atlantic Economic Conference

March 22 - 25, 2017 | Berlin, Germany

Firms with benefits: Does partnering with government affect a company's bottom line?

Friday, 24 March 2017: 09:40
Gayle DeLong, Ph.D. , Economics and Finance, Baruch College, New York, NY
Andrea Schertler, Ph.D. , Leuphana University, 21335 Lueneburg, Germany
Public-private partnerships (PPPs) bring together government and private entities to work toward a common goal.  The relationship established between a public agency and a private firm, however, could create an advantage for the firm vis-à-vis non-PPP competitors.  This study analyzes whether firms the government chooses to be members of PPPs enjoy more value from legislation than non-PPP firms.  Using event study methodology and the CRSP database, we look at important dates in the passage of legislation and determine whether the market value of PPP firms is higher, on average, than non-PPP firms in the same industry. Specifically, we examine pharmaceutical companies that participate in the Centers for Disease Control and Prevention (CDC) Foundation, a health-care PPP established in 1995.  We analyze two pieces of legislation: The Affordable Care Act, which the U.S. Congress passed in 2010, and the Food and Drug Administration Safety and Innovation Act, passed in 2012.  We expect to find that PPP firms enjoy higher returns.  Using Oaxaca decomposition, we examine whether any difference in market reaction is explained by differences in firm characteristics between PPP and non-PPP firms such as size and age of company.  We expect that observable firm characteristics will not explain the entire difference, suggesting that an unobservable such as PPP membership is important.  Using difference-in-differences estimations and company data from Compustat, we also compare performance before a company joins a PPP with the company’s performance after joining a PPP.  Using matching approaches, we minimize the differences in observable characteristics between treated and untreated companies. We expect a positive post-treatment effect, which suggests that participating in a PPP is associated with higher performance.