Corporate Influence and Political Corruption: Lessons from Stock Market Reactions to Political Events

By Milyo, Jeffrey | Independent Review, Summer 2014 | Go to article overview

Corporate Influence and Political Corruption: Lessons from Stock Market Reactions to Political Events


Milyo, Jeffrey, Independent Review


Americans are deeply cynical about both corporations and politicians. For the past several decades, Gallup has conducted regular polls of public confidence in various social and political institutions, with big business and Congress consistently ranking at the bottom of the list (see, e.g., Gallup 2013). Not surprisingly then, corporate political spending and lobbying are viewed with suspicion, further fueled by exaggerated rhetoric from reform-minded pundits, advocacy groups, and demagogues. Indeed, it's hard to imagine an easier means to curry favor with the mass public than to decry the influence of big business in politics! And although there is no shortage of academics who ride this bandwagon, many scholars of American politics understand both the role of money in politics and the influence of corporations to be much more limited than imagined by the conventional wisdom.

In previous work, I have explored the contrast between popular perceptions of the role of money in politics and the lessons of political economics (Milyo 1999; Milyo, Primo, and Groseclose 2000). In this essay, I review more recent empirical research on how financial markets respond to political events with the goal of better understanding the nature and extent of corporate influence in American politics. Of course, concern about corruption in politics is not limited to the influence of corporate political spending and lobbying. Unions, wealthy individuals, and even the major political parties loom large as potential agents of corruption. But movements in financial markets provide a unique lens on the value of corporate activities-hence, the focus here on corporate political influence. However, before launching into a discussion of political event studies in financial markets, I provide some background.

Corruption and Corporate Political Activity

It is no secret that the American public is worried about the existence and extent of political corruption. For example, in a nationally representative opinion survey of one thousand persons taken in the fall of 2008, a little more than 50 percent of respondents agreed that corruption in the federal government is "widespread" and an "extremely serious concern," while fewer than 5 percent considered corruption in the federal government to be "rare" or "not a concern" (Konisky, Milyo, and Richardson 2008). However, Americans are not sanguine about quick fixes for the problem of political corruption. The same survey reveals that only 7 percent of respondents strongly agree that there exists some package of reforms that would greatly reduce their concern about corruption in government. Obviously, for many Americans, politics is an inherently corrupt activity.

The timing of this survey, in the immediate aftermath of a financial panic, probably served to inflate popular concern about corruption, but evidence from other surveys indicates that there is a good deal of persistence in these views, especially with regard to members of Congress (e.g., Jones 2011 and Carroll 2006). Moreover, subsequent events likely have not had much of a salutary effect on public opinion. The past several years have witnessed government-rushed bailouts of private industry, unprecedented increases in stimulus spending, large loan guarantees to private firms, and unsavory machinations undertaken to round up votes in Congress to pass healthcare reform. The most recent election cycle has also seen the rise of so-called super PACs (political action committees) and total campaign spending that far eclipses previous records.

But what exactly is political corruption? Surely, illicit activities such as bribery and influence peddling are corrupt. These quid pro quo arrangements are what the courts are most concerned about when deciding whether there is a compelling government interest to justify regulations on political activities (for example, contribution limits, mandatory disclosure requirements, and so forth). But public opinion on "political corruption" likely extends beyond this legal concept and instead reflects popular concern with practices that may be legal but are nonetheless discomfiting (e. …

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