Corporate Political Donations: Investment or Agency?

Abstract

We examine corporate donations to political candidates for federal offices in the United States from 1991 to 2004. Firms that donate have operating characteristics consistent with the existence of a free cash flow problem, and donations are negatively correlated with returns. A $10,000 increase in donations is associated with a reduction in annual excess returns of 7.4 basis points. Worse corporate governance is associated with larger donations. Even after controlling for corporate governance, donations are associated with lower returns. Donating firms engage in more acquisitions and their acquisitions have significantly lower cumulative abnormal announcement returns than non-donating firms. We find virtually no support for the hypothesis that donations represent an investment in political capital. Instead, political donations are symptomatic of agency problems within firms. Our results are particularly useful in light of the Citizens United ruling, which is likely to greatly increase the use of corporate funds for political donations.

Political Activity and Firm Performance within Nonmarket Research: A Review and International Comparative Assessment

“…However, two studies (Bliss & Gul, 2012;Fan et al, 2007) reported a negative impact of CPA on performance in Malaysia and China. Similarly two studies (Aggarwal et al, 2011;Hadani & Schuler, 2013) reported negative outcomes of CPA in the United States. Two other studies (Ansolabehere et al, 2004;Hersch et al, 2008) found no significant impact.…”

“…Using United States data, Aggarwal et al (2011) found that "soft money" donations are negatively correlated with returns. They also found that donating firms acquire more and record lower abnormal returns on acquisition announcements.…”

Corporate Politics, Governance, and Value Before and After Citizens United

“…In contrast, Aggarwal et al. () found that that companies that made soft money donations to parties or donations to Section 527 committees from 1991 to 2004 (accounting for roughly 11 percent of the universe of U.S. publicly traded firms) tended to be large, slowly growing firms that had more free cash than other firms but spent less on research and development or business investments. They also found that corporate donations were negatively correlated with long‐term firm‐specific stock market performance.…”

Corporate Political Activity: An Integrated Model

“…Empirical evidence is also mixed.There is evidence in support for both positive (Cooper, Gulen, & Ovtchinnikov, 2010;Fisman, 2001;Frynas, Mellahi, & Pigman, 2006;Goldman, Rocholl, & Jongil So, 2009;Jayachandran, 2006) and negative (Aggarwal, Meschke, & Wang, 2012a;Ansolabehere, De Figueiredo, & Snyder Jr., 2003;Hadani & Schuler, 2013a;Hersch, Netter, & Pope, 2008;Okhmatovskiy, 2010;Siegel, 2007;Sun, Wright, & Mellahi, 2010) effect of CPA on business performance. (Tian, Hafsi, & Wu, 2009) suggest that even in emerging economies the effectiveness of CPA is not uncontested.…”