Investor Reaction to Covert Corporate Political Activity

Abstract

Research summary: Citizens United v. Federal Election Commission and subsequent developments created a covert channel for firms to allocate resources from corporate treasuries to political activity. Through the use of a financial market event study of an accidental disclosure of firms' contributions to a Republican nonprofit organization, I examine investors' reactions to covert investment in independent political expenditures. I find that, on average, contributing firms experienced positive abnormal returns around the disclosure event and that these abnormal returns were more positive for firms in heavily regulated industries as well as those previously making campaign contributions to candidates. However, firms that recently faced a shareholder resolution on political spending disclosure experienced negative abnormal returns, suggesting that the controversial nature of covert activity moderated investors' reactions. Managerial summary:The purpose of this study is to examine how investors reacted to an accidental disclosure of firms' investments in "dark money," a new form of corporate political activity allowed by the U.S. Supreme Court in its Citizens United decision. I find that, on average, investors reacted positively toward firms identified as making these new political investments, especially if the firms previously engaged in electoral politics or operate in heavily regulated industries. However, this reaction turned negative if the firm recently faced a shareholder resolution asking that it voluntarily disclose all of its political investments. An implication for managers is that they should consider their firms' legal and information environments as fully as possible before committing resources to new and potentially controversial political tactics.

Risky business: Do disclosure and shareholder approval of corporate political contributions affect firm performance?

“…Our paper also relates to work by Baloria et al (n.d.) and Werner (2017), who study shareholder activism on corporate political spending in the United States. Baloria et al (n.d.) show that even if a shareholder proposal for political spending disclosure fails or is withdrawn, firms often shift their disclosure policies because of the activist activity, and investors react negatively to these changes.…”

Non‐market Social and Political Strategies – New Integrative Approaches and Interdisciplinary Borrowings

“…Ortenblad, 2016) of non-market strategies. Other recent studies have explored inter alia investor reactions to non-market strategies (Arya and Zhang, 2009;Werner, 2017) and the socially constructed nature of non-market strategies (Gond, Cabantous and Krikorian, 2017;Orlitzky, 2011) and have wondered to what extent collective political actions and private political actions are substitutes or complements (Jia, 2014).…”

Location matters: Valuing firm‐specific nonmarket risk in the global mining industry

“…Firm‐specific nonmarket risks arise from a variety of social, political, and environmental events that can impose material costs on a firm (Doh, Lawton, & Rajwani, 2012; Lawton, McGuire, & Rajwani, 2013). Research on nonmarket risks has for the most part focused on political and institutional risks (Henisz & Zelner, 2012; Holburn & Zelner, 2010; Lawton et al, 2013; Werner, 2017), but there is increasing evidence that stakeholder mobilization through social movements can materially affect a focal firm (de Bakker, den Hond, King, & Weber, 2013; Dorobantu, Henisz, & Nartey, 2017; Henisz, Dorobantu, & Nartey, 2014; King & Soule, 2007), making the management of such stakeholders a critical feature of corporate strategy.…”