LIU Post Researcher: Corporate Political Contributions Don’t Pay
Study of 943 firms shows political giving doesn’t help bottom line, except in regulated industries; no benefit to having politically connected people on boards
Morgan Lyle,Assistant Director of Public Relations
LIU Post, Long Island University
Brookville, N.Y. – Contrary to popular belief, corporate lobbying and campaign contributions do not improve companies' bottom lines, except in closely regulated industries, researchers from LIU Post and Rice University have found.
A 10-year study of nearly 1,000 publicly traded companies showed corporate political activity had no effect or even negative impact on return on sales, an accounting measure of business operations. Market value – the price of a company's stock at the end of the year – experienced a "negative effect across the board," said Michael Hadani, an assistant professor of management at LIU Post, a campus of Long Island University in Brookville, N.Y., and lead author of the study.
Furthermore, the study showed having former politicians on boards of directors does little or no good. The study, "In Search of El Dorado: The Elusive Financial Returns on Corporate Political Investments," will be available online this fall and will be published in a forthcoming issue of the Strategic Management Journal.
"The reality is that is companies don't fully understand the complexity of the political arena, and they are overly optimistic about their ability to influence policy makers," Hadani said. "The result is that money spent in this arena does not actually improve returns, and in many instances can actually harm market performance."
The study examined business performance at 943 firms from the S&P 1500 between 1998 and 2008, which reported $5 billion in lobbying, contributions and other activity. It also examined 70 companies with politically connected directors – and found they did not benefit from the connections.
"The assumption is that hiring these people will create a private conduit to public policy makers," Hadani said. "But having more of these on the board is negatively associated with market value. Their shelf life is very limited. Political connections deteriorate over time. And board members should provide strategic guidance to the firm. It is unclear whether former politicians have that skill set."
The exception to the findings is industries that are closely regulated, such as banking, insurance or utilities.
"We believe this may reflect the critical role that government can play in controlling resources and limiting behaviors through its rulemaking and enforcement processes, necessitating some level of political activities by the regulated firms," said Doug Schuler, study co-author and associate professor of business and public policy at Rice's Jones Graduate School of Business. "In regulated industries, firms are better able to target specific agencies and get to know their staff, which is more likely to result in more stable interactions."
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