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Updated 4:00 PM January 24, 2007
 

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Corporate political donations make millions for shareholders

While research long has shown that firms benefit from having political connections, a new study shows that their shareholders are better off, too—to the tune of $154 million per year per firm.

Stocks of companies that contribute to a large number of congressional candidates—regardless of the total dollar amount of the donations—perform better than stocks of firms that give to fewer candidates, says Huseyin Gulen, a visiting professor of finance at the Stephen M. Ross School of Business.

"Remarkably, there is a positive and significant relationship between contributions and future profitability," says Gulen, who also is a professor at Virginia Tech University. "Although we can't say exactly how contributions increase firms' bottom lines, they appear to, and in a very significant manner."

Gulen and colleagues Michael Cooper of the University of Utah and Alexei Ovtchinnikov of Virginia Tech used data from the Federal Election Commission to create a comprehensive database on publicly traded firms' political action committee contributions to U.S. congressional campaigns since 1979. About 820,000 contributions by 1,930 firms were made during that time.

The average firm that makes a political donation, they say, contributes to 73 candidates in any five-year period, 53 of whom go on to win their elections. By supporting another 96 candidates, a company can increase its annual stock returns by as much as 6 percent, the study shows.

"This increase in returns is remarkable, given that the explicit contribution cost to support an extra 96 candidates is extremely small relative to the increase in firm wealth," Gulen said.

According to the study, firms, on average, contribute a total of nearly $65,000 to 56 candidates during any two-year election cycle. Republicans receive, on average, about $43,000 from each contributing firm, while Democrats get nearly $31,000. Corporate contributions comprise 12 percent of total campaign financing for House Republican candidates, 10 percent for House Democrats, 9 percent for Senate Republicans and 5 percent for Senate Democrats.

"Corporate contributions represent only a small fraction of candidates' total campaign financing and, therefore, are unlikely to buy candidates' attention," Gulen says. "However, if firms are making large contributions relative to other contributors, they are much more likely to be noticed, even though these contributions represent only a small percentage of total money raised."

The researchers say that the "contribution effect" is stronger for companies that have longer relationships with candidates, support more candidates from their home state and support more powerful candidates, as measured by politician seniority and committee rankings.

Moreover, they found a greater effect for industries with a smaller number of firms, more heavily concentrated sales and a higher percentage of unionized employees.

In all, only a small number of total companies make political contributions, and most of those firms are very large.

"To successfully compete in the market for political favors, it may require more than simply donating the legal limit of $10,000 in hard-money contributions—those directed to specific candidates," Gulen says. "That is, it may require soft money-like contributions or other forms of nonmoney favors, which are not publicly disclosed and which only larger firms can afford.

"Thus, a potential way to capture the benefits to firms from participating in the political process is to keep track of the total number of candidates that a firm supports, with the idea that, much like a venture capital portfolio of many startups, a few of the supported candidates will 'pay off big' and result in increases in firm shareholder wealth."

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