Corporate political giving doesn't pay: study

Jun 11, 2012
Photo courtesy: Rice University/Photos.com

Sixteenth-century European explorers probed the jungles and valleys of South America in search of El Dorado, the legendary lost city of gold, but came up empty-handed. Corporate political supporters may find themselves similarly unrewarded, according according to a new study from Rice University and Long Island University.

The researchers investigated the relationship between corporate political activity and financial returns on a set of 943 S&P 1500 between 1998 and 2008. They found that firms' political investments are negatively associated with market performance. The findingsalso revealed that cumulative political investments worsen both market and accounting performance, and that firms placing former public officials on their boards experienced inferior market performance and similar accounting performance than firms without such board members.

The study, "In Search of El Dorado: The Elusive Financial Returns on Corporate Political Investments," will be available online this fall and will be published in a forthcoming issue of the Strategic Management Journal.

"The view of corporations meddling in politics to the downfall of public interests is nothing new," said Doug Schuler, study co-author and associate professor of business and public policy at Rice's Jones Graduate School of Business. "Since our country's founding, corporate political activity has been seen as promoting its own interests and agendas over those of the broader public. This study simply demonstrates that it might not be quite the return on investment that corporate America or the public at large believes it to be."

The paper outlines four reasons to explain what the study calls its "largely unexpected results."

  • Managers who support corporate political giving may in general take overly risky business decisions.
  • Corporate political giving may represent poor-quality investments.
  • Corporate political giving is difficult for shareholders to monitor.
  • Personal reasons of senior managers, such as self-aggrandizement, ideological beliefs and other pressures may influence corporate political activity.
Contrary to these findings, the study found that corporate political giving is positively associated with for firms in highly regulated industries.

"We believe this may reflect the critical role that government can play in controlling resources and limiting behaviors through its rulemaking and enforcement processes, necessitating some level of political activities by the regulated firms," Schuler said. "In regulated industries, firms are better able to target specific agenciesand get to know their staff, which is more likely to result in more stable interactions."

Schuler hopes the research will challenge the preconceived notions about corporate political giving and focus on agency theory to better understand this practice.

"Like the explorers in search of El Dorado, there is a belief that political investments in D.C. will produce 'riches around the river's next bend,'" Schuler said. "Unfortunately for these politically investing firms, our results strongly show that the lucrative financial returns may never materialize."

The paper was co-authored by Michael Hadani, assistant professor of management at Long Island University.

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Eikka
1 / 5 (1) Jun 11, 2012
Contrary to these findings, the study found that corporate political giving is positively associated with market performance for firms in highly regulated industries.


There's a second alternative: the corporations in a highly regulated area of business are who dictate much of the regulations. That is what's known as crony capitalism - a form of corruption - using close connections to the political elite of a country to undermine your competitors.

It's not necessarily the government that controls the business, even when regulations are in place.

In a sense, the whole study just says that when the government keeps its hands off of business, the corporations keep their hands off of politics.
pauljpease
not rated yet Jun 11, 2012


In a sense, the whole study just says that when the government keeps its hands off of business, the corporations keep their hands off of politics.


That's not what it says at all. To use your phrasing, what it says is that when government keeps its hands off business, corporate hands in government doesn't pay (i.e. in unregulated businesses, corporate political donations don't enhance corporate profit). It does not say that corporations don't donate. And it also doesn't say what effects on the government these low return-on-investment corporate political donations have. Namely, while they don't do any good for the company, they might also harm the government, and have other effects not directly related to the company's business. For example, getting creationism taught in public schools, etc. I'm sure the individuals at those corporations are happy with their political donations even if it doesn't help the company.
Squirrel
not rated yet Jun 12, 2012
An alternative possibility for the correlation with companies in unregulated industries is those companies that are already on a downward path are desperately seeking any way to change course--and that includes giving "political investments". Companies that are doing well are not throwing money around on politicians hoping it will solve their problems. As a result, companies (except in regulated industries) with low financial performance are those that give.
gmurphy
not rated yet Jun 12, 2012
Corporate entities tend to work behind the scenes, placing sympathetic figures in influential positions, for example, the US FDA has been systematically infiltrated by individuals with clear links to the companies they're supposed to be regulating. That's why food containing GMOs is not labelled as such, despite being requested by consumer groups. Ordinary people have less rights than corporate entities in todays global economy :|
Eikka
not rated yet Jun 12, 2012
That's why food containing GMOs is not labelled as such, despite being requested by consumer groups. Ordinary people have less rights than corporate entities in todays global economy :|


Here's the thing though. Are those consumer groups really representing the consumers, or are they industry driven special interest groups that try to undercut the GMOs out of the market by spreading and leveraging public hysteria?

How do you tell the two apart?

You'd think that the entire corporate business world would embrace things like GMOs, but because of things like Monsanto patents on genetically modified crops, it starts to make sense to aim for your own foot because it's laying on your worst competitor's chest.