Corporate Political Contributions Research Articles

Aggregate economic policy uncertainty and corporate political contribution disclosure

PurposeUnlike other types of corporate disclosure, corporate political disclosure (CPD), which is the disclosure of corporate political contributions and the related governing policies and oversight mechanisms, does not provide completely new information to stakeholders. Some of the information disclosed in CPD is available from other public records (e.g. the Federal Election Committee website or OpenSecrets website). Given this unique feature of CPD, it is interesting to investigate the cost and benefit tradeoff for firms of altering their CPD practice in response to policy and political uncertainty.Design/methodology/approachThis study employs recently developed indexes of aggregate economic policy uncertainty (EPU) and a novel dataset of CPD transparency to examine the impact of EPU on CPD transparency and how the proprietary cost of corporate political activities moderates this association. The sample consists of S&P 500 companies from the 2012 to 2019 period.FindingsThe authors document that firms mitigate the heightened information asymmetry associated with higher aggregate EPU by increasing CPD transparency. The positive association between EPU and CPD is less pronounced for firms that are more sensitive to EPU, for firms that more actively manage EPU through corporate political contributions or lobbying activities and for firms that are followed by more analysts. The authors also find that more transparent CPD helps to mitigate the information asymmetry caused by heightened EPU. This study’s results hold when the authors control for other types of voluntary corporate disclosure.Originality/valueThis study contributes to the emerging literature on the determinants of CPD transparency by identifying EPU's positive impact on CPD transparency. This study also provides empirical evidence that the proprietary costs arising from the controversial nature of corporate political activities dampen firms' incentives to provide transparent CPD in response to heightened EPU, and that information on corporate political activities gathered and processed by financial analysts seems to lower the marginal benefit to companies of publicizing CPD on their own website.

Value of corporate political contributions from the investors’ perspective

In this study we consider corporate political contributions as a special type of social capital reserved for future contingencies. Firms benefit from making such contributions when the government suddenly intervenes in the market. We explore this value-creation mechanism in terms of the firm-investor relationship, not in terms of the traditional firm-government relationship. When a government intervention is being proposed or approved, firms that have made political contributions coordinating with political candidates are likely to enjoy better stock market returns than those that have not made such contributions. We also argue that firms that have made political contributions may experience lower stock returns than those that have not when the intervention plan is rejected. By focusing on the U.S. government’s Troubled Asset Relief Program (TARP) of 2008, our event study analysis with three news announcements finds that financial institutions that made political action committee (PAC) contributions indeed enjoyed higher stock returns when TARP was proposed and eventually approved. However, we do not find support for the investors’ devaluation of political contributions when TARP was once rejected during the review process. The findings propose that managers can use corporate political contributions as a strategic option to help investors reduce investment uncertainty by presenting their readiness for any unexpected change in the regulatory environment.

Corporate political spending and state tax policy: Evidence from Citizens United

To what extent is U.S. state tax policy affected by corporate political contributions? The 2010 Supreme Court Citizens United v. Federal Election Commission ruling provides an exogenous shock to corporate campaign spending, allowing corporations to spend on elections in 23 states which previously had spending bans. Ten years after the ruling and for a wide range of outcomes, we are not able to identify statistically significant effects of corporate independent expenditures on state tax policy, including tax rates, discretionary tax breaks, and tax revenues. Our results allow for a moderate economic effect on corporate tax rates and revenues, but suggest economically insignificant effects for other tax outcomes of interest to firms and their owners. A complementary analysis of the original introduction of the spending bans supports our finding that corporate spending has modest, if any, effects on tax policy.

Do shareholder views affect corporate political activities?

In this paper, we study shareholder views on corporate political contributions. We find that, with shareholders' explicit approval, firms are more likely to have higher corporate political contribution, measured by the amount of donations to the US political parties in the next election cycle. Firm's political contributions also have a positive long-run impact on firm valuations. When analysing firm's political ideology, we find weak evidence that Democratic party may benefit more from this shareholder's support than Republican party, particularly in case of firms which have recently switched their political ideology to Democratic party. Our results show that shareholders' explicit approval has an impact on firm's engagement of political activities and imply that if the shareholders stand at the same side of the firms, firms engage more in politically-related corporate activities. Our key results are supported in a regression discontinuity design and are robust to two-way clustered standard errors.

Firm partisan positioning, polarization, and risk communication: Examining voluntary disclosures on COVID-19.

Research SummaryThe COVID‐19 pandemic will rank among the greatest challenges many executives will have faced and not only due to the operational challenges it posed. Upon entering the U.S. context, the disease was immediately politically polarized, with clear partisan splits forming in risk perceptions of the disease unrelated to science. We exploit this context to examine whether firms' partisan positioning affects whether and how they communicate risk to their investors on a polarized public policy issue. To do so, we examine the covariation between firms' disclosure of COVID‐19 risks and the partisanship of their political giving. Our analysis of earnings call and campaign contribution data for the S&P 500 reveals a positive association between a firm's contributions to Democrats and its disclosure of COVID‐19 risks.Managerial SummaryFrom its onset in the United States, attitudes toward and discourse around the COVID‐19 pandemic was heavily politicized and perceptions of the disease's risks were seen as more serious by Democratic‐identifying individuals than Republican identifiers. In this study, we examine whether this pattern also holds for U.S. publicly traded firms, who can also stake out a political position through their corporate political action committee campaign contributions. In analyses of earnings call transcripts from the first quarter of 2020, we show that the more Republican‐leaning (Democrat‐leaning) a firm's campaign contributions are, the less (more) likely it was to voluntarily disclose risks related to COVID‐19. We argue that these findings hold implications for parties interested in interpreting firm's risk disclosures on politically polarized issues.

Personal Financial Incentives and Corporate Campaign Contributions

Despite the well-documented benefits of political participation, few firms engage in politics. We argue that low levels of corporate political participation can be rationalized by financial incentives of employees and shareholders who are the ultimate source of corporate contributions. Since even large firm-level benefits are trivial for individuals with small equity-stakes, few people have sufficient incentives to contribute. This logic explains why corporate political contributions are relatively small and why firms seek alternative channels of political influence. Empirically, we document that corporate PACs are financially constrained and that financial incentives of individual contributors are a strong determinant of campaign contributions.

CEO characteristics, firm performance, and corporate political contributions

AbstractWe investigate if CEO characteristics determine the choice of Political Action Committee (PAC) contributions by firms and if such participation leads to better firm performance. Using a unique, hand‐collected database, we also focus on the identity of the politicians receiving PAC contributions to examine the impact of the value‐relevance of such contributions. Examining data on corporate contributions made to candidates seeking federal office during the 2002, 2004, and 2006 election cycles, we find that CEO dominance and interest alignment influence strategic choices of firms with regards to establishing PACs. Our analysis of value‐relevant contributions shows that firms prefer to donate to politicians representing the state of a firm's headquarters, validating the truth to the adage that all politics is local. However, these targeted political contributions do not have a discernible impact on firm performance.

Corporate lobbying and political contributions and their effects on tax avoidance

This study looks at the impact of U.S. lobbying and political contributions on taxes avoided by U.S. publicly traded corporations. Previous research provides mixed conclusions about the effects when examined separately. Looking at political contributions and lobbying contributions simultaneously displays the larger picture. I find that lobbying expenditures and political contributions both lead to lower future taxes, but those political contributions are more effective in reducing taxes paid from what would be expected given the federal statutory rate.This study contributes to the literature in several ways. First, it provides empirical evidence on the positive effects of lobbying contributions and political contributions on taxes avoided. Second, the results of this study are particularly useful for future research following the U.S. Citizens United ruling that affects corporate lobbying and political contributions. Third, differing from previous research, I build a simultaneous equation model to jointly determine the link among lobbying contributions, political contributions, and taxes avoided addressing the endogeneity issues of those relationships. These insights can help firms, policy makers, and public affairs researchers understand the connection between contributions and tax avoidance.

Risky business: Do disclosure and shareholder approval of corporate political contributions affect firm performance?

AbstractThe role of corporations in the U.S. political process has received increased scrutiny in the wake of the U.S. Supreme Court'sCitizens Uniteddecision, leading to calls for greater regulation. In this paper, we analyze whether policies mandating greater disclosure and shareholder approval of political contributions reduce risk and increase firm value, as proponents of such rules claim. Specifically, we examine the Neill Committee Report (NCR), which led to the passage of the United Kingdom's Political Parties, Elections, and Referendums Act 2000 mandating new disclosure and shareholder approval rules. We find that politically active firms did not benefit from the NCR in the days after its release and suffered a decline in value in the months and years that followed. Politically active firms also suffered an increase in risk, as proxied by stock return volatility, following the release of the NCR. We theorize that these findings are due to the reduced flexibility these rules impose on corporate strategy as well as the potential for these rules to facilitate political activism against corporations.

Social Media and Voluntary Nonfinancial Disclosure: Evidence From Twitter Presence and Corporate Political Disclosure

This study uses a sample of 1,316 firm-year observations of S&P 500 companies (2012–2016) to investigate whether and how social media (i.e., Twitter) affects firms’ voluntary nonfinancial disclosure (i.e., corporate political disclosure). Our results show that Twitter-adopting firms are generally more transparent in their disclosure of corporate political contributions and of related policies and board oversight. Moreover, firms with more Twitter followers and firms whose corporate political activities are targeted in more Twitter messages are more transparent in such disclosures. Our cross-sectional analysis suggests that this effect is stronger for firms whose stakeholders are more active on Twitter and firms that are less visible or more reputable. Our results remain robust to different econometric model specifications that address the endogeneity issue, including Heckman two-stage procedure, a difference-in-difference analysis, and controlling for preceding year’s corporate political disclosure transparency. Our results remain qualitatively the same when we control for alternative social media platforms (i.e., Facebook) and non-interactive social media platforms (i.e., blogs and Really Simple Syndication feeds). Taken together, our findings suggest that social media (i.e., Twitter) presence exerts pressure on firms’ voluntary nonfinancial disclosure practices (i.e., corporate political disclosure).

Social Media and Voluntary Nonfinancial Disclosure: Evidence from Twitter Presence and Corporate Political Disclosure

ABSTRACTThis study uses a sample of 1,316 firm-year observations of S&P 500 companies (2012–2016) to investigate whether and how social media (i.e., Twitter) affects firms' voluntary nonfinancial disclosure (i.e., corporate political disclosure). Our results show that Twitter-adopting firms are generally more transparent in their disclosure of corporate political contributions and of related policies and board oversight. Moreover, firms with more Twitter followers and firms whose corporate political activities are targeted in more Twitter messages are more transparent in such disclosures. Our cross-sectional analysis suggests that this effect is stronger for firms whose stakeholders are more active on Twitter and firms that are less visible or more reputable. Our results remain robust to different econometric model specifications and controlling for alternative social media platforms. Taken together, our findings suggest that social media (i.e., Twitter) presence exerts pressure on firms' voluntary nonfinancial disclosure practices (i.e., corporate political disclosure).JEL Classifications: G38; M41; M48.Data Availability: Data are available from the sources indicated in the text.

Why New Corporate Law Arises: Implications for the 21st Century

The corporate governance landscape is much different than a generation ago. Independent directors now hold a great majority of all board seats, institutional shareholders hold a supermajority of all shares in public corporations, and activist shareholders have become a recurring player in entity governance. In turn, other corporate stakeholders express increasing concern about shareholders’ use of their power for selfish reasons and the perceived pernicious impact of shareholder wealth maximization as a guide for corporate law. This chapter, part of a book on “The Corporate Contract in Changing Times” asks: Why does corporate law change and how it might change now? Corporate law changed regularly in the first half of our country’s history. A series of innovations followed one after another during the nineteenth century — limited liability; general incorporation statutes; a strong shift to director-centric corporate governance; authorization of corporations holding stock in other corporations; and the disappearance of ultra vires and other limits on corporate behavior. By the arrival of the twentieth century all the key economic elements of the modern corporation were in view and corporate law settled into a stable pattern we still see today. State law abandoned its prior regulatory approach and its continual change in favor of a director-centric structure with expansive room for private ordering that has remained remarkably stable. Federal law stepped in to restrain economic concentration (antitrust law), to protect employees and consumers against corporate power (done by industry regulation, employment and consumer laws not corporate governance), to limit corporate political contributions, and to make recurring, if sporadic and non-comprehensive, efforts to enhance the role of shareholders against managers. This chapter examines this history of change in corporate law in America, the dramatic and abrupt shift in the focus of state corporate law visible in last decade or so of the nineteenth century, the interactive pattern of state and federal law that has grown up over the second half of the country’s history and prominent theories explaining what leads to corporate law change. Together these various strands suggest there will be no fundamental change in state corporate law even in this time of visible stress to the now classic structure. Changes that we see is more likely to come from federal law or, as has been most visible in recent times, because of market and technological-driven changes outside of law.

Corporate Political Contributions and the Allocation of U.S. Federal Procurement

This paper aims to determine the extent to which corporate political contributions and the allocation of government procurement contracts are related. We gather information regarding the contributions made by 911 S&P500 companies in 9 congressional election cycles between 1993 and 2010, and study subsequent government procurements. We find that making a contribution, especially to congressional candidates from the Democratic Party, is associated with a considerably higher likelihood of subsequently receiving a procurement contract. On average, a marginal contribution of 1 dollar is associated with 410 dollars in marginal procurements. Companies that contribute to a larger number of candidates subsequently get more procurement contract value. Furthermore, we show that the effects of contributions are persistent over time, that they vary strongly across industries and do not have negative spillovers on firm profitability regardless of the amount.

Corporate Political Transparency

Corporations are facing a growing demand for the transparency of political contributions. In the United States, this demand has largely focused on the implementation of a mandatory disclosure law. It rests on the assumption that legal enforcement can make it easier to observe the ties between corporations and political parties. In this study, I challenge this assumption. I build my case by first developing a conceptual foundation of corporate political transparency (CPT). I argue that in the absence of economic benefits, legal enforcement has a limited effect on CPT. Instead of encouraging transparency, mandatory disclosure can lead to the concealment of corporate political contributions. To develop a model of concealment, I borrow the characterizations of disguise from theatrical drama. Using the context of Indian firms, I show the limitation of mandatory disclosure and the efficacy of regulatory incentive. My study highlights the need for a broader debate on CPT to understand the relative implications of regulatory policies.

Intermediate Scrutiny for Corporate Political Contributions

A corporation contributes to a Super PAC that supports a candidate for public office. A shareholder sues, alleging that management breached its duty of loyalty by making the contribution to promote its own political views rather to serve than the corporation’s best interests — i.e., by acting in bad faith. What standard will a Delaware court apply when reviewing management’s decision to cause the corporation to make the contribution?Myriad scholars have opined that the court will apply the standard of review for ordinary business decisions: the management-friendly business judgment rule. Unfortunately for our shareholder plaintiff, this rule presumes that management acts rationally, without a conflict of interest — and in good faith. Further, management can easily concoct a justification for supporting any major-party political candidate. Thus, absent a “smoking gun” that points to bad faith, it will be extremely difficult for a shareholder to prove that management has acted disloyally. This article departs from the scholarly consensus that courts should apply the business judgment rule to review corporate political contributions. Instead, courts should apply the intermediate level of scrutiny — the Unocal test — that is applied whenever management adopts defensive measures in the face of a hostile takeover. Delaware courts apply Unocal to defensive measures due to the “omnipresent specter” that management will promote its own interests over the corporation’s best interest. Under Unocal, management must earn the protection of the business judgment rule by establishing the reasonableness and proportionality of its defensive actions. Courts evaluating management’s decision to make a Super PAC contribution should apply Unocal for two related reasons. First, like corporate charitable donations, corporate political contributions give rise to serious agency cost concerns. These same concerns led prior commentators to propose applying intermediate scrutiny to charitable contributions; post-Citizens United, this proposal should be updated to include corporate political contributions. Second, upon closer review, corporate Super PAC contributions give rise to greater agency cost concerns than corporate charitable gifts, due to the increased potential of management pretext in the former context. Indeed, although corporate Super PAC contributions do not pose an inherent conflict between management and the corporation, the possibility of pretext is so great that there an “omnipresent specter” that management will serve its own purposes whenever it causes the corporation to make a political contribution.Therefore, by analogy to Unocal, a court evaluating a corporate political contribution should ask (1) whether management had reasonable grounds to believe that the contribution would directly or indirectly advance specific corporate interests, rather than some general political viewpoint; and (2) whether the contribution was reasonable, both as a method of addressing the specific corporate interest and in its amount. Only if management can show that the political contribution satisfies both prongs should it be protected by the business judgment rule.

Policy Uncertainty, Political Capital, and Firm Risk-Taking

We document a new channel of corporate political contributions. Firms that are highly sensitive to government policy uncertainty have a stronger incentive to contribute to political candidates, and these firms' risk-taking and performance should be more affected by the gain or loss of a political connection relative to less-sensitive firms. We verify these patterns in the data using a sample of close U.S. congressional elections. We first show that policy-sensitive firms donate more to candidates for elected office than less-sensitive firms. We then show that plausibly exogenous shocks to policy-sensitive firms' political connections produce larger subsequent changes in these firms' investment, leverage, firm value, operating performance, CDS spreads, and option-implied volatility relative to less-sensitive firms. Our results represent the first attempt in the literature to disentangle the effects of policy sensitivity and political connectedness on firms' risk-taking and performance and suggest that many existing results in the political connections literature are driven by policy-sensitive firms.

Playing the Corporate Political Contributions Lottery: Evidence from Tax Avoidance

In this study we examine the channels through which corporate political contributions affect firm-level tax outcomes. Firms that make political contributions are more likely than other firms to be singled out in rifle-shot tax legislation and receive firm-specific tax relief. The ex-ante payoff to political contributions if rifle-shot tax relief is the only benefit of making political contributions is negative, but for some firms the ex-post payoff is enormous. Firms also receive tax benefits when members of their industry cohort make political contributions, regardless of the firm’s own political contributions, consistent with politicians taking actions that benefit an entire class of assets or type of investment. Finally, we find some evidence that political connections affect tax enforcement, resulting in lower tax burdens for politically active firms.

Corporate Political Contributions as Bad Faith

A shareholder who objects to a corporate political contribution can file a derivative lawsuit to challenge that contribution as a breach of management’s duty of loyalty to the corporation. Such a lawsuit will face long odds, however, if it is founded upon a traditional theory for breach of the duty of loyalty, like waste or self-dealing. Yet, there is a better theory for a shareholder to employ when filing suit to challenge a corporate political contribution: bad faith. Bad faith is a better basis for challenging a corporate political contribution than either waste or self-dealing because bad faith is a more flexible concept than self-dealing and a less difficult standard to satisfy than waste. Even if she intends no harm, a director acts in bad faith when she (1) takes official action that is motivated primarily by any reason other than advancing the corporation’s best interests or (2) consciously disregards her fiduciary duties. This Article identifies several examples of political contributions — both real and hypothetical — that are ripe for challenge as bad faith because they are made for reasons other than advancing the corporation’s best interest. For example, a CEO acts in bad faith if she causes the corporation to make a contribution in support of her own political views or a friend who is running for office. However, in the absence of a “smoking gun,” it will be difficult for a plaintiff to prove that the contribution was made for personal reasons rather than to advance the interests of the corporation. To overcome the difficulty of proving motive, this Article offers a novel argument: essentially all corporate political contributions made by large public corporations today constitute bad faith because they reflect management’s conscious disregard for shareholders’ political views. In our zero-sum, two-party political system, a board simply must know that a political contribution in support of a candidate from either major party will upset a substantial number (and perhaps a majority) of shareholders. What’s more, although the duty of loyalty typically demands that management consider the best interests of the corporation as a whole, not individual shareholders, a different rule should apply to political contributions. The policy rationales for vesting decision-making power in the board, rather than shareholders or courts, simply do not apply to political contributions. Political matters are outside of management’s core competence, and shareholders probably do not view management as a proxy for such matters. Further, political contributions differ greatly from most corporate spending, including charitable contributions. As a result, even if political contributions are not strictly ultra vires — i.e., beyond the corporate powers — they certainly verge on being ultra vires. When a board acts “in the vicinity of” ultra vires, its authority is at its lowest ebb; to shore up that authority, the board ought to consult the shareholders. If failing to poll the shareholders constitutes bad faith, boards wishing to contribute corporate funds in support of political candidates might nonetheless obtain protection of the business judgment rule in two ways. First, the board could submit a non-binding resolution to the shareholders at each annual meeting to gauge shareholder support for political contributions, generally, and also to gauge support for each major party. Second, management could establish a good faith reason for not consulting the shareholders for a specific contribution — for example, if the contribution directly and unambiguously promotes the corporation’s core business.

Strange bedfellows? Voluntary corporate social responsibility disclosure and politics

We show a reliable association between voluntary corporate social responsibility (CSR) disclosure and company political interests, which we proxy by company employees’ contributions to political action committees and statewide voting in presidential elections. This relation is most pronounced for the contributions of Democratic employees at companies in states that vote for the Democratic presidential candidate. We also show a positive association between corporate political contributions and excess stock returns. A portfolio strategy of investing based on company size, CSR disclosure intensity and corporate political contributions produces a significant positive mean excess stock return of 4.5 per cent over 3 months following CSR disclosure.

Strange Bedfellows? - Voluntary CSR Disclosure and Politics

We show a reliable association between voluntary CSR disclosure and company political interests, which we proxy by company employees’ contributions to political action committees and statewide voting in presidential elections. This relation is most pronounced for the contributions of Democratic employees at companies in states that vote for the Democratic presidential candidate. We also show a positive association between corporate political contributions and excess stock returns. A portfolio strategy of investing based on company size, CSR disclosure intensity, and corporate political contributions produces a significant positive mean excess stock return of 4.5 percent over three months following CSR disclosure.