Do Campaign Contributions and Lobbying Expenditures by Firms Create "Political" Capital?

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Introduction

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. …