In the past 25 years, companies that contributed to a large number of political candidates saw a much higher annual return on equity than companies that didn’t contribute, an academic study finds.
A portfolio of all the companies that contributed to candidates generated a 1,221 percent compounded rate of return over the 25-year period. In comparison, a portfolio of the companies that didn’t contribute saw a 619 percent rate of return over the same period.
For the study, a group of three business school professors selected 1,258 companies that donated $944,045,697 (through corporate political action committees) to political campaigns from 1979 to 2004. They also studied 2,345 companies that didn’t contribute.
For the companies that contributed, the researchers measured the total contributions, which averaged $23,471 per year, against the annual rate of return those companies saw in the same 25-year time period and found the average company saw a $156.6 million more in annual compounded returns per year compared to other non-contributing firms that have similar risk characteristics.
While political scientists have often looked at the relationship between corporate political contributions and favorable voting, the professors sought to quantify whether firms themselves benefit financially from political contributions, Alexei Ovtchinnikov, an assistant professor of management and finance at Vanderbilt University told CFO.com. Finance professors Michael J. Cooper at the University of Utah and Huseyin Gulen of Purdue University also worked on the study, which was first conducted in 2007 and updated last month.
“Given that there’s a lack of consensus over whether contributions benefit the firms, it was surprising that contributions did have an effect on the welfare of the firms,” Ovtchinnikov says. “One of the reasons it looks so high is because we’re only counting hard-money contributions. We can certainly imagine that there are other contributions we don’t have access to,” such as soft-money contributions, which aren’t reported to the Federal Election Commission.”
The study also looked at the strategies that companies with the highest annual rates of return applied when contributing. The researchers found that targeting donations to candidates that represent a company’s home state and to members of the House of Representatives produced higher annual returns throughout the 25-year period.
If a company were to contribute to an additional seven congressional representatives in its home state it could expect to increase annual returns by 1.7 percent a year, they found.