Corporate political donations have a long tradition in this country, but no one has ever examined the correlation between the practice and what insights it offers about the donating companies.
Corporate political donations have a long tradition in this country. Companies typically donate with the hope (and perhaps) expectation that their largesse will pay off in some form.
Thanks to the 2010 Supreme Court ruling that lifted restrictions on the dollar amounts that businesses can donate, the issue has achieved hot potato status of late. But no one has ever examined the correlation between the practice and what insights it offers about the donating companies. Until now.
Carlson School Professors Rajesh Aggarwal and Tracy Wang recently reviewed the effects of corporate political donations. Using data from 1991 to 2004, they looked at 1,381 companies that donated money to political campaigns.
The results were eye-opening. "We examined the relationship between yearly campaign contributions (from corporate treasury, previously known as soft-money donation) and subsequent shareholder returns and found a significantly negative association between the two," says Wang. "In terms of magnitude, every $10,000 of soft-money campaign contribution is associated with a decrease of 7 basis points in shareholders' risk-adjusted returns."
The researchers offer several reasons for those less-than-stellar results. One factor: Companies that donate directly from corporate funds are often large, slowly growing operations that have free cash flow, but which also place relatively little emphasis on R&D and investment spending. Heavy political contributors also tend to make more--and worse--acquisitions than their counterparts that don't donate.
Finally, if shareholders aren't benefitting, who is? Corporate managers. As the study notes, the "results support the view that lack of transparency allows donations to function as a form of private benefits for managers."
"Shareholders need to demand more information about corporate political donations, especially after the Citizens United ruling" says Wang, referring to the 2010 Supreme Court decision that lifted limits on political giving by corporations and unions. "Managers now have lots of discretion in using corporate resources for political activities."
"Corporate Political Contributions: Investment or Agency?"
R. Aggarwal, et al, Business and Politics, Volume 14, Issue 1 (2011)