Since the Supreme Court’s 2010 Citizens United decision held that corporate political expenditures are free speech under the First Amendment, various groups and individuals have advocated imposing new limits on corporate political activity. These efforts include calls on shareholders to demand that corporations refrain from involvement in the political process. Such demands have been buttressed by an emergent academic literature which, in contrast to what had been an established perspective, has questioned whether corporate financial contributions and even lobbying are actually in the interest of corporate shareholders. This paper reviews this new literature, contrasts it with previous work on this subject, and determines that the new studies ultimately fail to establish that corporate political activity adversely affects shareholder returns.
Corporate political activities take a variety of forms, including direct campaign contributions, joining and supporting trade associations, lobbying, the hiring of former public officials, advertising to move public opinion, and grassroots advocacy promotions. Lobbying has long been the dominant form for political participation by corporations and other interests: In the 2010 election cycle, for example, firms and other interests spent $6.8 billion on lobbying, compared with PAC expenditures of $1.3 billion.
The dominant academic view for the last 20 years is that companies undertake political activity to secure advantages for themselves, based on a combination of opportunity and necessity. Their incentives to do so are clear, given that modern governments influence national economies in ways that affect the sales and returns of particular industries and companies.
There is a robust academic literature, both theoretical and empirical, on campaign contributions to candidates, especially those provided through corporate political action committees (PACs). The most common explanation for these PAC contributions is that they help corporations and other interests secure greater access to legislators and other public officials. Empirical studies also have shown that corporate PAC activities are positively related to a corporation’s size, concentration, level of regulation, and sales to the government. This research clearly suggests that cost-benefit considerations influence corporate decisions to form and use PACs.
The academic research on lobbying has stressed the role that corporate lobbying plays in providing information to legislators and other public officials, or, in one variation, providing political intelligence and connections. Further, various recent studies have shown that lobbying generates positive economic returns. A 2009 study published in the American Journal of Political Science, for example, found that for the average firm lobbying Congress, across industries and various measures of financial performance, each additional $1 spent on lobbying was associated with $6-to-$20 in new tax benefits. Similarly, a 2010 working paper by Hui Chen and two co-authors found that $1 spent on lobbying was associated with an additional $24–to-$44 in corporate income. The same study further found that those firms which lobbied most intensively—defined as lobbying expenditures as a share of assets, sales, and market capitalization—outperformed their benchmarks by 5.5 percent to 6.7 percent per year, for the three years following their intense lobbying.
Other studies have demonstrated the value of corporate political connections, measured through PAC contributions, and found additional, positive contributions from corporate political activity. These studies include, for example, event studies examining the effects on the value of politically-active firms of the sudden death of Senator Henry “Scoop” Jackson (D-WA) in 1983 and the surprise defection of Senator James Jeffords (R-VT) from the Republican Party in 2001. Further, a 2010 study published in The Journal of Finance suggests that the economic benefits of a corporation’s political connections are also evident over the long term. The authors reported that a one-standard-deviation increase in the number of candidates supported by a firm over the previous five years was associated with excess abnormal returns of 2.6 percent.
Extensive analysis and evidence, then, support the view that corporate participation in the political process yields generally positive returns for firms and their shareholders.
Three recent studies have challenged this broad consensus, arguing that, on balance, political activity by corporations harms shareholder value. The authors of these studies claim that firms that engage in political activities will perform worse than their peers because they waste firm resources to advance their executives’ personal interests and because they generally are more likely to have “poor corporate governance:”
- A recently published study by Rajesh Aggarwal from the University of Minnesota and two colleagues focuses exclusively on corporate soft-money contributions to political parties and donations to 527 organizations unregulated by campaign finance laws, and finds that the corporations most likely to make these contributions underperform their peers.
- The other two studies, from John Coates of Harvard Law School, argue that in many cases, shareholders are harmed by all forms of corporate political activity, including lobbying and PAC contributions.
- In a 2010 article, Coates observes that S&P 500 firms with poor corporate governance as measured by an index of corporate governance indicators are more likely to be politically active. This study then purports to show that their corporate political activity harms their shareholders, using a series of regressions to allegedly test for a direct relationship between shareholder value and corporate political activity.
- In a subsequent 2012 study, Coates upgraded his methodology from that employed in his 2010 study and accordingly modified his earlier claims and conclusions. He continues to argue that much corporate political activity is not shareholder-oriented and that the net effect of corporate political activity is negative for shareholders of companies that are neither highly regulated nor highly dependent on sales to government.
A close examination of the three new studies shows that their reasoning and findings do not actually challenge, much less refute, the academic consensus that corporate political activity benefits shareholders or, at a minimum, does not harm them:
- The Aggarwal et al. Study. Although the authors infer that their soft-money and 527 contributions explain the underperformance of companies engaged in such activity, their results support, at most, an inference that those companies’ underperformance may be related to factors that also influence their decisions to contribute soft money and 527 funds.
- The 2010 Coates Study. Coates purports to show that the inverse correlation between PAC activity and his preferred corporate governance index shows that such activity is a function of poor corporate governance. But his data show that the correlation reverses when one looks at PAC-contribution levels: as his own measure of corporate governance improves, the average level of PAC contributions increases. Further, Coates’s regressions purporting to show a negative relationship between firm performance and corporate PAC activity and lobbying are poorly designed and subject to selection and omitted-variable bias. Notably, Coates does not even include as variables in his regressions many of the firm- and industry-level characteristics associated with corporate political activity, mistakes that would be sufficient basis for any study’s rejection by any peer-reviewed journal.
- The 2012 Coates Study. In Coates’ 2012 study, after addressing some of the methodological problems in his 2010 study, he finds a positive relationship between political activity and firm value for regulated industries, which by his definition encompass roughly one-third of GDP (including alcohol, tobacco, aircraft, pharmaceuticals, utilities, telecommunications, transportation, banking, and insurance). Further, when he controls for relevant variables such as firm size and industry, his correlations for unregulated industries largely disappear. The only correlation that remains statistically significant is a negative relationship between the decision to lobby and firm value for unregulated firms, and the coefficient for that relationship is so low that the actual effect could very well be zero.
Summary of Findings
The relationship between political activity and firm performance or shareholder value is varied and complex, but the body of research in this area has established several important findings:
- Firms employ a variety of strategies to influence the political process in ways that may, or should, improve their performance and benefit their shareholders.
- Corporate spending decisions on campaign contributions and lobbying efforts are generally made in a rational and strategic manner.
- This political spending does not appear to systematically affect congressional voting, but it does regularly influence policymaking.
- Corporate political activity appears to have a generally positive effect on firm value, as reflected in excess market returns.
- The precise mechanisms that produce these positive effects remain unclear.