Corporate political action committees (PACs) donate about $300 million to federal political candidates each two-year election cycle. Despite the common perception that corporate donations influence politicians’ behavior, research offers mixed evidence regarding the value of these donations. Some scholars argue that donations are part of a quid pro quo in which politicians reward generous firms with access, lax regulation, and other favors. Others argue that there is little empirical evidence that donations influence policy and that political donations are best viewed as a form of consumption. A third view suggests political donations reflect agency problems and can decrease firm value when company managers seek political benefits for themselves at the expense of shareholders.
In a recent study—The Value of Corporate Political Donations: Evidence from the Capitol Riot—we contribute to this debate by examining how investors responded to decisions by hundreds of companies to halt their political donations following the riot in the U.S. Capitol building on January 6, 2021. After the riot—the worst attack on Congress since 1814—about one third of S&P 500 companies announced their PACs would halt political donations. Of those, 72 percent stopped giving to all candidates and 28 percent stopped giving to the 147 Republican “objectors” who voted against certifying results of the 2020 election. As a result of this unprecedented change in firms’ policies, PAC contributions from these companies were on average $100,000 lower during the first three months of 2021 than during the same period in 2019. (We compare donations in 2021 with 2019 because both years were the first year of their respective election cycles. Donations in 2020—a general election year—would be less comparable to 2021.)
To estimate the value of these donations, we conduct an “event study” that measures how investors reacted to news that companies were halting donations. Event studies, which have a long tradition in finance, compare the stock returns of companies around the time of an event—like stopping political donations—with the returns of the overall market. Using this method, we examine investors’ consensus regarding how stopping political donations affects firm value. If political donations increase firm value, then stopping them ought to be bad for shareholders and reduce stock prices.
We find that the decision to stop political donations is associated with an average decrease in firm value of 0.6 percent during the two days following news of firms stopping PAC donations. There is little difference in stock returns between companies that stopped all donations and companies that only stopped donating to the Republican objectors. We also find that investors’ reactions are not strongly related to several factors that theory suggests they should be if PAC donations increase firm value. Stock returns are not related to (a) the size of a firm’s political contributions, (b) the intensity of regulation in a firm’s industry, (c) the firm’s lobbying expenditures, or (d) the firm’s score on governance and political accountability indexes. If political donations are valuable for shareholders, then investors ought to respond more negatively to stopping them when a firm is more politically active, more susceptible to regulation, and more likely to make donations aligned with shareholders’ interests (e.g., scores higher on indexes of transparency and accountability). The absence of such relationships, combined with the moderate decrease in stock returns, suggests that corporate PAC donations have small effects on firm value.
A cynical interpretation of firms’ announced halts to PAC contributions following the Capitol riot is that firms were attempting to assuage critics or accrue positive press coverage without meaningfully changing their donation behavior. To investigate, we study PAC contributions before and after the Capitol riot, comparing firms that did and did not pledge to stop donations. On average, firms that pledged to stop donations contributed about twice as much to politicians than other companies before the Capitol riot. Therefore, it is not the case that only politically inactive firms pledged to stop giving. After the riot, firms that pledged to stop donations contributed significantly less to political candidates, both compared to their prior giving and relative to firms that did not pledge to stop donations. This was especially true in the first quarter of 2021, immediately following the riot. In subsequent quarters, many firms that pledged to halt donations resumed giving to candidates. This does not necessarily mean that firms broke their promise; several firms that pledged to stop donations were clear that the change in policy was an indefinite pause while the PAC reviewed its giving criteria. Firms that pledged to stop giving to Republican objectors, however, largely honored that commitment through the third quarter of 2021 (the latest quarter with available data). Before the riot, these firms each gave about $15,000 per quarter to Republicans who voted against certifying results of the 2020 election. After the riot, however, most of these firms donated nothing to these same Republicans. Overall, Republican lawmakers who objected to certifying the election results are raising much less money from corporate PACs than in prior years.
There are several advantages of our study relative to other research, but also limitations. Key advantages include our large sample size, the large magnitude of the changes in PAC donations, and the abruptness of firms’ decisions. Each of these factors make it easier to detect changes in firm value associated with stopping donations, and our large sample allows us to explore how investors’ reactions vary with factors like the dollar amount of firms’ prior donations. A limitation of our analysis is that we cannot observe all of a firm’s political activities. While we show in the paper that firms do not “make up” for decreased donations to candidates by increasing donations to Super PACs, we cannot observe whether firms increase their support of “dark money” groups, which do not have to disclose their donors, following the riot.
Overall, our results suggest that corporate PAC money is not buying politicians’ votes or other large regulatory favors. Additionally, our results show that companies faced little backlash from investors for their pro-democracy advocacy following the Capitol riot. Employees and other stakeholders pushing firms to be more active on social issues may conclude from this that companies have little to lose by using PAC money to signal dissatisfaction with politicians’ behavior. Many companies are under increasing pressure to publicly take stances on such issues, yet survey evidence from the Public Affairs Council indicates few corporate PACs currently incorporate politicians’ stances on controversial social and political issues into their donation criteria, instead focusing on candidates’ positions and voting history on core business issues. Yet, as America becomes more polarized, corporations may find it increasingly more difficult to separate politicians’ positions on business issues from their more controversial stances when making donations. While unprecedented, firms’ responses to the Capitol riot may be an early indication of trends to come.
Christopher Poliquin is an Assistant Professor at UCLA Anderson School of Management
Young Hou is an Assistant Professor at University of Virginia Darden School of Business
This post is adapted from their paper, “The Value of Corporate Political Donations: Evidence from the Capitol Riot” available on SSRN.
The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.