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Business and Politics

Editor-in-Chief: Aggarwal, Vinod K.

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Corporate Political Donations: Investment or Agency?

Rajesh K. Aggarwal1 / Felix Meschke2 / Tracy Yue Wang3

1University of Minnesota

2University of Kansas

3University of Minnesota - Twin Cities

Citation Information: Business and Politics. Volume 14, Issue 1, ISSN (Online) 1469-3569, DOI: 10.1515/1469-3569.1391, April 2012

Publication History

Published Online:
2012-04-26

Abstract: 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 returns. 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.

Keywords: political contributions; agency problems; stock returns

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