We examine corporate donations to political candidates for federal offices in the United States from 1991 to 2004. Firms that donate have operating characteristics consistent with the existence of a free cash flow problem, and donations are negatively correlated with eturns. A $10,000 increase in donations is associated with a reduction in annual excess returns of 7.4 basis points. Worse corporate governance is associated with larger donations. Even after controlling for corporate governance, donations are associated with lower returns. Donating firms engage in more acquisitions and their acquisitions have significantly lower cumulative abnormal announcement returns than non-donating firms. We find virtually no support for the hypothesis that donations represent an investment in political capital. Instead, political donations are symptomatic of agency problems within firms. Our results are particularly useful in light of the Citizens United ruling, which is likely to greatly increase the use of corporate funds for political donations.
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Author Notes: We thank the referees and the editor as well as Jane Buchan, Craig Brown, John Coates, Mara Faccio, Eliezer Fich, Timothy Guinnane, Michael Johannes, Brandon Julio, Jonathan Koppell, Joshua Pollet, Paul Povel, Paolo Volpin, Jeff Zwiebel, and conference and seminar participants at the Western Finance Association Meetings, the European Summer Symposium in Financial Markets in Gerzensee, the Financial Intermediation Research Society Conference, the European Finance Association Conference, the Midwest Finance Association Conference, the NUS Corporate Finance Conference, the Asian Finance Association Annual Conference, the Chinese International Conference in Finance, the Yale Conference on Shifting Capital Markets and Corporate Performance, the American Finance Association Annual Meetings (upcoming), Claremont-McKenna College, University of Alabama, Indiana University, Georgia State University, University of Cincinnati, the Carlson School of Management, and the University of Minnesota Law School for helpful comments. We thank the Millstein Center at the Yale School of Management for financial support. Mufaddal Baxamusa, Truong Duong, and Yihui Pan provided excellent research assistance.
- Agency problems
- Political contributions
- Stock returns