Research News

Campaign spending’s clear winner: Corporations

Vanderbilt research finds companies benefit when employees make political donations

New research from Vanderbilt University finds that corporations gain clear financial benefits when individual employees make political donations.

Using innovative techniques to match geographic areas that are most affected by government policy with “economically relevant” or powerful politicians, Alexei Ovtichinnikov, a professor of finance at the Vanderbilt Owen Graduate School of Management, and Eva Pantaleoni, a researcher at the Vanderbilt Kennedy Center, analyzed nearly 5 million campaign donations between 1991 and 2008.

Individuals donate most

What they describe in a new research paper is strong evidence that individuals who make political donations – whether at the behest of companies or not – directly benefit businesses in their communities.

“The reason we looked at individual contributions is because it accounts for about two-thirds of all the money given directly to politicians,” said Ovtchinnikov, noting that only about 10 percent of firms are actively involved in campaign finance. “Individuals are the big players in this game.”

Alexei Ovtchinnikov (Photo courtesy of Owen Graduate School of Management)
Alexei Ovtchinnikov (Photo courtesy of Owen Graduate School of Management)

The 2010 U.S. congressional elections saw an unprecedented boom in campaign spending – $4 billion in all, with about $1.12 billion coming in the form of individual contributions to candidates, according to the Center for Responsive Politics.

But it’s companies that are reaping the most recognizable benefits. Ovtchinnikov said firms located in areas where individual contributors most intensely targeted “economically relevant” politicians saw positive changes in return on asset (ROA) and market-to-book ratios. The bottom-line boost that comes from campaign donations is similar to investing in a new research-and-development or capital-expenditure project.

Further, the economic benefit to firms strengthens when donations come from areas that have high unemployment rates, even if the politicians on the receiving end don’t live in that district.

The new study also finds that political contributions flow disproportionately from companies’ home districts to key members of congressional committees with jurisdiction over their industry.

“What you’re seeing is the ability for people to reach politicians with dollars when they can’t reach them with votes,” Ovtchinnikov said.

The net result is that a significant amount of political donations come from narrow geographic clusters. Between 1991 and 2008, for example, three small areas around New York, Chicago and Washington, D.C., accounted for 11.7 percent of all campaign contributions -$425.9 million – even though they represented less than 2 percent of the population.

Other studies show corporate benefits

While the most recent study examined individual donations, a previous study by Ovtchinnikov and others published last year in the Journal of Finance shows a correlation between corporate political donations and higher stock returns.

“Our results . . . suggest an extremely high rate of return for firms participating in the political contribution process,” Ovtchinnikov and his co-authors write. “Alternatively, it is possible that politicians find it most beneficial to grant favors to large firms because those are the firms that generate the largest amount of tax revenues and jobs.”

David Parsley (Photo courtesy of Owen Graduate School of Management)
David Parsley (Photo courtesy of Owen Graduate School of Management)

In a similar Vanderbilt study, David Parsley, E. Bronson Ingram Professor of Economics and Finance at Owen, found that money spent on corporate lobbying is positively correlated with the firm’s subsequent financial performance.

Parsley found that lobbying expenditures are highly concentrated – the top 5 firms contributed 42 percent of the total amount spent by the top 20 firms – but simply spending more does not guarantee abnormal returns. Indeed, by grouping firms into “matched” portfolios and tracking portfolio performance, Parsley found that only the companies engaged in the most intense lobbying efforts significantly outperformed their benchmark peers.

“Firms in this category earned an excess return of 5.5 percent over the three years following portfolio formation,” while the remaining firms earned essentially a zero excess return, Parsley and his co-authors write. The authors conclude that this suggests that not all lobbying expenditures have the same objective; for instance, some efforts may aim to mitigate truly bad legislative and regulatory outcomes, while others may be designed to keep rivals at bay.

For his part, Ovtchinnikov says these studies, by demonstrating that campaign and lobbying expenditures have positive effects on corporate performance, open up intriguing new lines of inquiry for researchers.

“We have shown that firms are benefiting,” he said. “Now, we need to begin to ask why they benefit.”

The Vanderbilt Owen Graduate School of Management is ranked as a top institution by BusinessWeek, The Wall Street Journal, U.S. News & World Report, Financial Times and Forbes.