Corporate Political Contributions and Stock Returns

Abstract

We develop a new and comprehensive database of firm-level contributions to U.S. political campaigns from 1979 to 2004. We construct variables that measure the extent of firm support for candidates. We find that these measures are positively and significantly correlated with the cross-section of future returns. The effect is strongest for firms that support a greater number of candidates that hold office in the same state that the firm is based. In addition, there are stronger effects for firms whose contributions are slanted toward House candidates and Democrats. Copyright (c) 2010 the American Finance Association.

Politically connected firms in Spain

“…Therefore, consistent with the previous literature, we expect firm size to positively affect the likelihood of establishing a political connection (e.g., Agrawal and Knoeber, 2001;Faccio, 2006;Faccio et al, 2006;Boubakri et al, 2008;Cooper et al, 2010). Moreover, authors such as Khwaja and Mian (2005), Boubakri et al (2012) and Cooper et al (2010) show that politically connected firms are characterized by the use of a higher level of debt; therefore, we include the variable DEBT, measured as total debt divided by total assets as a control variable. Moreover, Cooper et al (2010) and Chen et al (2011) show that politically connected firms are characterized by higher profitability and greater investment opportunities.…”

“…However, political connectivity is also relevant in democratic governments because the greater transparency of political connections facilitates the detection of undesirable acts and the implementation of sanctions. Morck et al (2000) show a large number of political connections in Canadian companies, and Goldman et al (2009) andCooper et al (2010) demonstrate the high political connectivity of U.S. companies. Thereby, business elites have incentives to interact with the political arena in order to affect the development of the legal framework and economic development conditioning the distribution of capital and investment in an economy (La Porta et al, 1998).…”

“…Moreover, authors such as Khwaja and Mian (2005), Boubakri et al (2012) and Cooper et al (2010) show that politically connected firms are characterized by the use of a higher level of debt; therefore, we include the variable DEBT, measured as total debt divided by total assets as a control variable. Moreover, Cooper et al (2010) and Chen et al (2011) show that politically connected firms are characterized by higher profitability and greater investment opportunities. For this reason, we include the effect of growth opportunities MTB, defined as the market value of equity divided by the book value of equity.…”

“…In this line, Hermalin and Weisbach (1988) argue that to understand how board members are elected it is crucial to understand the role that the board plays in the whole system of corporate governance. Third, most studies on the impact of political connections on firm value have focused on the Anglo-Saxon countries or on the Asian environment using an event methodology and small samples; therefore, their results are hardly generalizable (Cooper et al, 2010).…”

Can I stay a BIT longer? The effect of bilateral investment treaties on political survival

“…For the evidence demonstrating that politically increased firms enjoy increased firm value, seeFaccio (2006),Ferguson and Voth (2008),Goldmann et al (2009), Cooper et al (2010,Desai and Olofsgȧrd (2011),Dube et al (2011). For studies showing that politically connected firms have preferential access to finance, seeKhwaja and Mian (2005),Bai et al (2006),Claessens et al (2008),Faccio (2010).…”