November 10, 2006
Study Finds Corporate Political Donations Increase Share Price, But Ignores Potential Risks
by Bill Baue
The academic paper documents up to six percent annual return increase when companies support more
candidates, but it neglects to address rising legal risks of donations being defined as bribes.
Do corporate political contributions pay off? The answer, according to a working paper by Michael
Cooper of the University of Utah, Huseyin Gulen
and Alexei Ovtchinnikov of Virginia Tech, is a
resounding yes when "pay off" means boosting stock returns and profits. The study examines Federal
Election Commission (FEC) data on 769,044
contributions made by 1,522 firms between 1979 and 2004, and finds an increase of up to six percent
in annual returns when companies support more candidates.
"Although we can't say
exactly (on a firm-by-firm basis) how contributions increase firms' bottom lines, they appear to,
and in a very significant manner," the authors state. "Overall, our results are important because
they provide new findings which show: 1) large contribution/return effects for many firms over many
years, 2) that the effects are strongest for firms which concentrate their contributions on House
members, Democratic candidates, and candidates in the same state as the firm, 3) the effects are
stronger for firms in certain types of industries and 4) that the effects are due in part to
changes in firm operating performance."
The authors surmise the constitutional provision
that revenue and appropriations bills must originate in the House likely accounts for the stronger
positive effects for firms supporting House candidates. The positive effect linked to Democratic
candidates is counter-intuitive, as Republican candidates receive higher contributions from more
firms, so the authors do not attempt to explain the reasons behind this finding.
industries that support the largest number of candidates are defense, tobacco, aircraft, drugs,
automobiles, and oil. The industries with the strongest positive effects from political
contributions are those with smaller numbers of firms, more heavily concentrated sales, and a
higher percentage of unionized employees.
"[A]n increase in labor unions presence in an
industry may have a positive impact on participation rates because of an increased firm incentive
to lobby for pro-business (which may take a form of anti-labor) regulations," the authors state.
Interestingly, the authors take an agnostic approach to ethical implications of their
They sprinkle terms such as "favors" and "purchase political support" throughout the
paper as if in a moral vacuum, where these actions are judged only on their financial impact. In
the rare instance when they address broader social implications of their findings, they leave it up
to others to tackle them.
"Perhaps future work will address whether our results are due
to elected officials maximizing general public welfare or whether it suggests an unfair exchange of
dollars for policy, resulting in wealth transfers from those firms without access to those firms
with access," the authors state.
While such neutrality can represent a strength in
academic research, in this instance it exposes a significant blind spot of the study, because the
ethical implications of political contributions can increasingly expose companies to financial
"Companies now face much greater risk that their political contributions can
be seen as bribes from a legal standpoint," said Bruce Freed, co-director of the Center for
Political Accountability (CPA), which promotes transparency and board
oversight of corporate political donations. "Corporate contributions are legal, but if there is a
pattern of contributions coming just before or just after--and thus related to--an official act by
a government official that benefits the company, then that can be construed as a bribe."
"This week's election makes it clear that, as campaigns become much more competitive, much more
money is getting raised, which means companies will be under greater pressure to give," Mr. Freed
told SocialFunds.com. "Companies need to become more sensitive to the risks they face and take
steps to manage this risk."
Mr. Freed points to an article in the June
2006 edition of Washington Monthly entitled "The End of Legal Bribery" by Jeffrey Birnbaum
that examines the Abramoff case to lay out this argument.
"Deep in the plea agreements
won by Justice Department lawyers are admissions by the defendants--Abramoff and his cronies,
ex-DeLay aides Tony C. Rudy and Michael Scanlon--that they conspired to use campaign contributions
to bribe lawmakers," Mr. Birnbaum writes. "Even though these gifts were fully disclosed and within
prescribed limits, the government said they were criminal, and the defendants agreed."
such prosecutions were to become commonplace, the paid persuaders of Washington and their big-money
clients would be dealt a body blow," he adds. "If prosecutors begin to assert as a matter of
routine that lobbyist gifts and campaign contributions are a form of bribery, it could open up a
whole new front on the decades-old (and largely ineffective) effort to break the nexus of money and
politics in the capital."
While the study's findings seem to suggest that companies should
contribute to ever-more candidates to increase profitability (one particular calculation pegs
annual returns "absurdly high" at 654,836 percent), the potential exposure to legal liability for
bribery gives pause.
"Ken Gross, head of the political law practice at Skadden, Arps, Slate, Meagher & Flom, has been
swamped this year with requests for information and analysis from big corporations and trade
associations eager to know how to stay out of trouble in post-Abramoff Washington," Mr. Birnbaum
writes. "Gross is warning his big business clients to be extra careful about how they handle their
millions of dollars in contributions to candidates for federal office."
gifts even subtly to a request to take a specific action, he warns, could put both the giver and
the receiver into legal jeopardy," he concludes.