Bad ROI on Political Candidate Contributions
The CFA Institute recently published a report detailing some of its research on corporate political contributions. The findings were neither flattering for executives nor positive for shareholders:
Shareowners may be asking for such disclosure because they understandably want to know how their money is being spent. Or perhaps their intuition is telling them that political spending is not a great investment. They would be right — recent study reveals that investing in political spending is indeed a horrible investment. Unless, maybe, you are a CEO looking for a political favor down the road. The paper, Corporate Political Contributions: Investment or Agency?, reviews corporate donations to political candidates for federal offices in the United States from 1991 to 2004. Among its findings:
- Firms that donate have operating characteristics consistent with the existence of a free cash flow problem.
- Donations are negatively correlated with returns. A $10,000 increase in donations is associated with a reduction in annual excess returns of 7.4 basis points. (By extension, a $1 million donation would be expected, on average, to decrease annual returns by approximately 7.4 percent.)
- Worse corporate governance is associated with larger donations.
- Even after controlling for corporate governance, donations are associated with lower returns.
- Political donations are symptomatic of agency problems within firms (individuals in firms use corporate money to support personal causes or candidates).
We would caution a little about correlation vs. causation on some of these findings, but they are certainly enlightening about why some executives spend money on politics and what it implies about whose interests they are putting first.