Politics & Elections Sep 5, 2017

When Cor­po­ra­tions Donate to Can­di­dates, Are They Buy­ing Influence?

The sur­pris­ing result sug­gests the need to rethink the role of mon­ey in politics.

Michael Meier

Based on the research of

Anthony Fowler

Haritz Garro

Jörg L. Spenkuch

Two months after tak­ing office, Pres­i­dent Don­ald Trump approved the con­struc­tion of the con­tro­ver­sial Key­stone XL oil pipeline. The project had been halt­ed by Pres­i­dent Oba­ma. But Trump made revers­ing that deci­sion a priority.

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Did cam­paign dona­tions impact Trump’s decision?

Dur­ing the 2016 pres­i­den­tial cam­paign, oil com­pa­nies gave a lot of mon­ey to Don­ald Trump,” says Jörg Spenkuch, an assis­tant pro­fes­sor of man­age­r­i­al eco­nom­ics and deci­sion sci­ences at the Kel­logg School. The ener­gy sec­tor had con­tributed near­ly one mil­lion dol­lars to Trump’s cam­paign. Now that he was in office, the spec­u­la­tion went, he had to pay those com­pa­nies back for their support.

Spenkuch, how­ev­er, hes­i­tates to draw a clear line from the dona­tions to the president’s deci­sion. From the very begin­ning of his can­di­da­cy, Trump had vig­or­ous­ly sup­port­ed the ener­gy sec­tor. So, Spenkuch won­ders, did their mon­ey actu­al­ly change Trump’s mind in any way? 

It’s not clear,” he says. What we don’t know is what would have hap­pened if these cor­po­ra­tions hadn’t donated.” 

In a new study, Spenkuch and two coau­thors, North­west­ern eco­nom­ics doc­tor­al stu­dent Haritz Gar­ro and Uni­ver­si­ty of Chica­go polit­i­cal sci­en­tist Antho­ny Fowler, use an inven­tive approach to put the quid-pro-quo nar­ra­tive to the test. To their sur­prise, they find no evi­dence that cam­paign con­tri­bu­tions in the U.S. pro­duce big ben­e­fits for corporations. 

These polit­i­cal con­nec­tions that are forged by donat­ing to politi­cians don’t seem to be reflect­ed in the company’s value.”

That result pos­es a chal­lenge to the com­mon refrain that Amer­i­can democ­ra­cy is for sale to the high­est bidder. 

Just tab­u­lat­ing the amount of mon­ey in pol­i­tics does not tell us any­thing about what the polit­i­cal process would be like if cor­po­ra­tions weren’t allowed in,” Spenkuch says.

What Stocks Say about Buy­ing Influence

To under­stand whether com­pa­nies are impact­ed when they back a win­ning can­di­date, the authors turned to U.S. Con­gres­sion­al, guber­na­to­r­i­al, and state leg­isla­tive elec­tions and used a tried-and-true met­ric: the company’s stock price.

We know that stock mar­kets respond near­ly effi­cient­ly to all kinds of infor­ma­tion,” says Spenkuch. When a com­pa­ny releas­es an earn­ings state­ment, stock prices react with­in seconds.” 

The authors want­ed to see whether, in the days fol­low­ing an elec­tion, the stocks of com­pa­nies that gave mon­ey to win­ners per­formed bet­ter, across the board, than those that gave mon­ey to losers.

Their rea­son­ing was that share­hold­ers would know which can­di­dates com­pa­nies had sup­port­ed and how that would impact the com­pa­nies post-elec­tion. There­fore, share­hold­er expec­ta­tions are a good proxy for how an elec­tion will affect the company’s future success.

If a company’s stock price rose mean­ing­ful­ly fol­low­ing the elec­tion of its favored can­di­date, it meant that share­hold­ers believed that the com­pa­ny would do bet­ter as a result of the elec­tion — and that they were will­ing to put their own mon­ey behind that belief. This would be strong evi­dence that share­hold­ers tru­ly expect­ed the com­pa­ny to receive ben­e­fits of some kind, such as direct favors, high-lev­el insid­er infor­ma­tion, or poli­cies favor­able to their indus­try, from the new­ly elect­ed official.

But there was a catch.

As Spenkuch explains, larg­er and more suc­cess­ful com­pa­nies tend to bet on win­ning can­di­dates, while small­er, weak­er com­pa­nies are more like­ly to sup­port los­ing can­di­dates. The rea­son for this is not entire­ly clear — it could be that more suc­cess­ful com­pa­nies are sim­ply bet­ter at fore­see­ing future events, or that exec­u­tives at larg­er cor­po­ra­tions have more lee­way to throw cor­po­rate funds behind their own pet causes.

What­ev­er the rea­son, the com­pa­nies that give to win­ners are like­ly to have high­er-per­form­ing stocks than the com­pa­nies that give to losers, elec­tions aside. Sim­ply com­par­ing the post-elec­tion price changes of com­pa­nies that picked win­ners ver­sus losers could be a red her­ring, Spenkuch says. We’d be com­par­ing apples and oranges.” 

So the schol­ars devised a workaround. Instead of look­ing at all elec­tions, they would look only at extreme­ly close elec­tions — those where the can­di­dates’ vote tal­lies were with­in five per­cent of a tie.

Because these races were so close, the think­ing went, big and small com­pa­nies alike would have rough­ly a fifty-fifty chance of pick­ing a winner. 

It’s like flip­ping a coin on whether their invest­ment pays off or not,” Spenkuch says.

Coau­thor Antho­ny Fowler had cre­at­ed a dataset of these close elec­tions for an ear­li­er study. Mean­while, data on dona­tions from cor­po­rate polit­i­cal action com­mit­tees (PACs) was read­i­ly avail­able from the Fed­er­al Elec­tion Com­mis­sion. (A 1907 act of Con­gress pro­hibits cor­po­ra­tions from donat­ing direct­ly to polit­i­cal cam­paigns, so cor­po­rate exec­u­tives and share­hold­ers instead cre­ate PACs, which fun­nel com­pa­ny mon­ey to a par­tic­u­lar candidate.)

The final dataset includ­ed infor­ma­tion on near­ly 150,000 con­tri­bu­tions from cor­po­rate PACs, which allo­cat­ed mon­ey to can­di­dates in 18,744 races between 1980 and 2010.

With the data in hand, the researchers ana­lyzed how cam­paign-con­tribut­ing com­pa­nies’ stock prices changed fol­low­ing an election.

Our expec­ta­tion going into this was that com­pa­nies derive sig­nif­i­cant favors from these dona­tions,” Spenkuch says.

They were in for a surprise.

The Impact of Cor­po­rate Mon­ey in Politics

On aver­age, the vic­to­ry of a company’s pre­ferred can­di­date led its stock price to increase by just 0.05 per­cent. But this small result was sta­tis­ti­cal­ly insignif­i­cant, mean­ing it could be a fluke.

The take­away, accord­ing to Spenkuch: Our results sug­gest that dona­tions do not buy mean­ing­ful polit­i­cal favors.”

If con­tri­bu­tions offer com­pa­nies so lit­tle in return, why do they con­tin­ue to donate at all? 

This is espe­cial­ly remark­able because even in the absence of direct polit­i­cal favors, you might expect the vic­to­ry of a favored can­di­date to boost a company’s stock price. After all, com­pa­nies are like­ly donat­ing to the can­di­date they think will back their pri­or­i­ties. This in itself could encour­age investors, regard­less of any quid pro quo from com­pa­ny dona­tions. Yet the data showed no stock mar­ket ben­e­fit to finan­cial­ly back­ing the win­ning candidate.

For the medi­an com­pa­ny in the dataset, worth about one bil­lion dol­lars, a 0.05 per­cent bump in firm val­ue would trans­late to around $500,000. While that may seem like a sub­stan­tial sum, Spenkuch argues that it is small change for a bil­lion-dol­lar com­pa­ny — and any favors that would reverse a reg­u­la­tion or alter a crit­i­cal pol­i­cy in the company’s favor should be worth far more.

That does not mean the con­tri­bu­tions are nec­es­sar­i­ly wast­ed. Spenkuch notes that the medi­an firm spends only $3,750 on cam­paign dona­tions in a giv­en elec­tion cycle, and spreads that small sum between dif­fer­ent races. For an invest­ment so small, $500,000 is a rather hefty return.

So from the per­spec­tive of the com­pa­ny, it might be a good, albeit very small, invest­ment,” he says. How­ev­er, he notes that both the invest­ment and the return are well under a mil­lion dol­lars — extreme­ly small pota­toes for a bil­lion-dol­lar company. 

Giv­en the size of these invest­ments, they’re not as large as pun­dits would make you believe,” he says. 

Tak­ing Anoth­er Look at Polit­i­cal Donations 

While the data — and, thus, the find­ings — span a wide range of places, years, and offices, Spenkuch points out a short­com­ing: since they only includ­ed extreme­ly close elec­tions, it could be the case that polit­i­cal favors are sim­ply more preva­lent in less com­pet­i­tive races.

You could for instance imag­ine that polit­i­cal dona­tions only gen­er­ate returns if they’re giv­en to a pow­er­ful can­di­date,” he explains. Say, the chair of the Ways and Means Com­mit­tee — that guy is not in our dataset. He’s going to be reelect­ed with near certainty.”

To address this con­cern, the researchers per­formed a sec­ond analy­sis, this time using a dataset from the now defunct online bet­ting mar­ket InTrade. The web­site let spec­u­la­tors place bets on the out­comes of elec­tions — and those bets, in turn, reflect­ed who was expect­ed to win, and with what probability.

They gath­ered InTrade data from 119 Sen­ate races between 2004 and 2010, which chart­ed how each candidate’s odds of vic­to­ry fluc­tu­at­ed lead­ing up to Elec­tion Day. The researchers then exam­ined how the stock of a com­pa­ny react­ed when their candidate’s prob­a­bil­i­ty of win­ning changed.

Once again, they found no sig­nif­i­cant relationship.

These polit­i­cal con­nec­tions that are forged by donat­ing to politi­cians don’t seem to be reflect­ed in the company’s val­ue,” Spenkuch says. 

A New Puz­zle Emerges

Enlight­en­ing as these find­ings are, they pose anoth­er vex­ing ques­tion: If con­tri­bu­tions offer com­pa­nies so lit­tle in return, why do they con­tin­ue to donate at all?

Spenkuch and his coau­thors can imag­ine a few plau­si­ble explanations.

Oth­er schol­ars have sug­gest­ed that cam­paign con­tri­bu­tions might send a sig­nal — to con­vince investors that the com­pa­ny will oppose new reg­u­la­tions, per­haps. Alter­na­tive­ly, exec­u­tives could sim­ply be using com­pa­ny mon­ey to sup­port can­di­dates they like per­son­al­ly under the guise that it will ben­e­fit the firm.

In future research, Spenkuch wants to test which of these expla­na­tions is most like­ly. I don’t think any­body knows at this point.”

For now, he hopes that the paper’s find­ings will not be overstated.

I don’t want to go as far as to say there’s no cor­po­rate influ­ence in pol­i­tics,” Spenkuch says, not­ing that finan­cial con­tri­bu­tions are only a sliv­er of the ways a cor­po­ra­tion could exert influ­ence. In order to get the full pic­ture, one would also need to con­sid­er the role of the mul­ti-bil­lion-dol­lar lob­by­ing indus­try, he insists. 

That said, he thinks the new evi­dence will chal­lenge spec­ta­tors, pun­dits, and social sci­en­tists alike to think hard­er about their claims regard­ing mon­ey in pol­i­tics. For exam­ple, in light of the study, a pol­i­cy move like the Key­stone XL deci­sion sud­den­ly looks less like a nefar­i­ous cor­po­rate bar­gain. Spenkuch thinks that chal­leng­ing this nar­ra­tive is critical.

To sen­si­bly dis­cuss the top­ic of cor­po­rate mon­ey in pol­i­tics,” he says, we need to eval­u­ate the whole pic­ture — not just the out­liers and anecdotes.”

Featured Faculty

Jörg L. Spenkuch

Associate Professor of Managerial Economics & Decision Sciences

About the Writer

Jake J. Smith is a writer and radio producer in Chicago.

About the Research

Fowler, Anthony, Haritz Garro and Jorg Spenkuch. 2017. "Quid Pro Quo? Corporate Returns to Campaign Contributions." Working paper.

Read the original

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