Research Article

Value of corporate political contributions from the investors’ perspective

Published: N/A

Journal: Journal of General Management

DOI: 10.1177/03063070231164100

Abstract

In this study we consider corporate political contributions as a special type of social capital reserved for future contingencies. Firms benefit from making such contributions when the government suddenly intervenes in the market. We explore this value-creation mechanism in terms of the firm-investor relationship, not in terms of the traditional firm-government relationship. When a government intervention is being proposed or approved, firms that have made political contributions coordinating with political candidates are likely to enjoy better stock market returns than those that have not made such contributions. We also argue that firms that have made political contributions may experience lower stock returns than those that have not when the intervention plan is rejected. By focusing on the U.S. government’s Troubled Asset Relief Program (TARP) of 2008, our event study analysis with three news announcements finds that financial institutions that made political action committee (PAC) contributions indeed enjoyed higher stock returns when TARP was proposed and eventually approved. However, we do not find support for the investors’ devaluation of political contributions when TARP was once rejected during the review process. The findings propose that managers can use corporate political contributions as a strategic option to help investors reduce investment uncertainty by presenting their readiness for any unexpected change in the regulatory environment.

Faculty Members

  • Yoon-Suk Baik - College of Business, Korea Advanced Institute of Science and Technology (KAIST), South Korea
  • Jihyun Eun - Franklin P. Perdue School of Business, Salisbury University, USA
  • Seung-Hyun Lee - Jindal School of Management, The University of Texas at Dallas, USA

Themes

  • Corporate Political Contributions
  • Government Market Interventions
  • Regulatory Changes
  • Social Capital
  • Investment Uncertainty
  • Firm-Investor Relationship

Categories

Download Article