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In this paper we examine a simple yet important question: Are firm political contributions and lobbying a way of buying long-term influence? Specifically, our analysis examines the extent to which capital markets view campaign contributions and lobbying expenditures as an asset in terms of increased firm value. Capital market research can provide important insights into firm behavior because it focuses on the impact of decisions made by people risking real resources in investment decisions. We provide evidence on how money influences politics that hopefully complements other research that more directly examines political markets.
We find little evidence of a relation between firms' campaign contributions and lobbying expenditures and their Tobin's q (actually, market/book value of the firms' assets). In this approach, we follow other studies that use q to measure the value of the firm's intangible capital (e.g., the value of advertising, R&D, or environmental performance). Researchers have found a positive and significant relation between intangible assets and q. Analogously, political capital, if it exists, is an intangible asset. However we fail to find any significant statistical relation between q and political spending. This is consistent with the view that capital markets consider campaign contributions and lobbying as an expense and not a capital expenditure with long-run returns.
The result of our work coupled with those of others has important implications for both firm behavior and the political process. For firms, it suggests that political spending has only a short-lived effect, or perhaps should simply be considered a cost of doing business by firms that engage in the activity. Firms may lobby to bring themselves and their interests to the attention of regulators as part of an ongoing process, unlike expenditures on advertising or R&D. But the effects of political contributions and lobbying can depreciate quickly. In the political arena, if campaign contributions and lobbying are not long-lived in the value of the firm, it suggests the importance of dynamics in the political process. This is consistent with the arguments of Ansolabehere et al. (2003) who argue that political contributions are more a consumption good than a way of "buying political influence. They suggest that campaign contributions and lobbying are comparable to firm charitable contributions--contributions to people and ideas the givers want to help, rather than directly buying influence.
Evidence on Political Contributions and Firms
A complete review of the literature related to the impact of political contributions is provided in Ansolabehere et al. (2003), Stratmann (2005), and Brasher and Lowery (2006). In general, studies on the effects of campaign expenditures, especially by firms, yield mixed results. Brasher and Lowery (2006) suggest one reason for the mixed results is that many studies examine the activities of PACs rather than lobbying more generally. In addition, most studies only examine the largest firms (also a limitation of our study). Finally, the existing models may not be very good at modeling firms' characteristics.
Ansolabehere et al. (2003) come to a similar conclusion. Basing their work on an argument originally made by Tullock (1972), they suggest that expenditures by firms to achieve political influence are actually relatively low given the value of public policies. Thus, it is not surprising that researchers have found little relation between contributions and governmental action.
Therefore, the current economics literature leaves the issue of the effects of campaign contributions by firms on the political market and on the firms themselves as unsettled. Here, we address the measurement of the value of political capital through the financial capital markets. Several recent studies also use the capital markets to determine the effects of political contributions on firm value. For example, Jayachandran (2006) finds significant stock price losses to firms that had contributed to the Republican party when Senator Jeffords left the Republican party, abruptly giving control of the Senate to the Democrats. Cooper et al. (2007) find a strong positive correlation between firms' stock returns and campaign contributions. They provide evidence that contributions are associated with firm value creation. Those studies don't necessarily imply spending is capital and they can show association rather than cause and effect. For example, the Jayachandran paper is consistent with the view that Republicans are good for firms and firms contribute to Republicans, which is turn is consistent with the view that campaign contributions are similar to charitable contributions.
In the context of our paper, there are several possible effects of firms' political spending. Theoretically, campaign contributions can help get favorable candidates elected. However, this is not likely to be important since the impact of any individual firm's contributions on an election is likely to be minimal. Thus, firms may not contribute significantly in an election to back a winner per se. They may contribute (even to both sides) to have some access later to influence legislative outcomes. One way (which again may not be that important) is affecting how legislators vote on an issue. More importantly, money can influence how legislation is written and perhaps whether bills are introduced or blocked. Campaign contribution dollars can be seen as buying influence or buying access (which is often followed up by lobbying). The question for us is whether the firm is buying future influence. If not, the dollars represent a short-term expense rather than a long-term capital expenditure whose value is compounded into the firm's market value.
The Contribution of this Work
We suggest that our paper makes several contributions. First, we include the effects of lobbying expenditures on individual firms. Earlier work has not usually examined the effects of lobbying expenditures effects because, unlike campaign contributions, lobbying can't be tied to individual politicians, parties, or for the most part, specific issues (one exception is de Figueiredo and Tiller (2001) who examine lobbying at one agency the FCC). That is, it is very difficult to examine the effect of lobbying on how a legislator votes or on which candidate was elected. Lobbying may be much more important than contributions, however, because much more is spent on this activity since there are no spending limitations (see Ansolabehere et al. 2003). (1) One reason is that lobbying unlike campaign contributions does not directly affect who is elected. Thus, firms may have an incentive to limit campaign contributions and free ride off the expenditures of others who also support a favorable candidate.
Lobbying expenditures can be better targeted than campaign contributions to specific issues. Lobbying money can be used to influence legislation and the executive branch of government including the behavior of government agencies and departments (for example, FDA regulations, defense spending, and securities regulations). Lobbying is viewed as so important that the Congressional Democratic majority is suggesting restrictions on lobbying as a key part of their proposed ethics reforms. Again, we are interested in whether lobbying and campaign contributions has long-term political capital effects, or simply short-run effects. For convenience in the paper, we will refer to the effects of political spending as impacting legislators It should not be forgotten that these expenditures may also be directed to the executive branch.
Our main contribution is that we use evidence from the capital markets to examine indirectly the nature of political contributions. (2) We specifically test whether political expenditures (campaign contributions and lobbying) affect the value of the firm's assets (through the intangible asset of political capital) as proxied by Tobin's q. We directly follow the approach of Konar and Cohen (2001) who test whether environmental performance of a firm affects its q (it does) and other similar papers. (3) If it exists, political capital is an intangible asset. Here, we test whether q is significantly related to campaign contributions and lobbying expenditures after controlling for other factors that affect q (for example, industry, growth, and other intangible assets).
Sample Selection, Variables and Descriptive Statistics
Our sample selection criteria are aimed at including the firms in the time periods where it is most likely we will find an effect of lobbying and the effects would not be likely to change in the period. In our sample we restrict ourselves to publicly held firms with annual sales exceeding $500 million. We confine our estimates to large firms because to the extent there are economies of scale in lobbying the effects would be greater for larger firms (de Figueiredo, and Tiller (2001, p. 92) cite numerous studies that fend economies of scale in contributions). We eliminate firms in traditionally heavily regulated industries, such as banking and other financials, telecommunications, and utilities. We eliminate these industries since much of the regulation of these industries occurs at the state level for which we do not have data on political contributions or lobbying expenditures. (4) Our data correspond to the political cycles for the 1998 and 2000 election periods. We stop before the political effects of 9/11 and the Iraq war become significant, and passage of the McCain-Feingold Law changed the nature of campaign finance. It was signed March 2002 and went into effect January 1, 2003.
We construct q from Compustat data for fiscal years 1999 and 2001. To minimize possible simultaneity, the Compustat data are paired with political expenditures for the preceding election cycle; FY01 with the 2000/1999 cycle and FY99 with the 1998/1997 cycle. After adjusting for missing data, the final sample consists of 1,331 observations.
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