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Publicly Traded Companies and Political Donations: Do Corporate Campaign Contributions Enhance Shareholder Wealth?

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Publicly Traded Companies and Political Donations: Do Corporate Campaign Contributions Enhance Shareholder Wealth?
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McTaw, Marvin
Houston, Joel
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Publicly Traded Companies and Political Donations:
Do Corporate Campaign Contributions Enhance Shareholder Wealth?

Marvin McTaw


ABSTRACT


This paper analyzes the relationship between donations given to political parties and candidates (i.e. Republicans

and Democrats), and the stock returns of corporations who make the donations, in an attempt to determine the

value created for shareholders through political donations. Using daily stock returns, S&P 500 returns, and

Iowa Electronic Markets data (A futures market whose contract prices are determined by political outcomes),

multiple regression analysis and correlation studies were performed. All studies come to the same conclusion: there

is no statistical evidence that suggests shareholders receive any returns from political support. Implications,

including the possibility that political donations are simply the reflection of management are discussed. Analysis

is also performed on who gives, why firms give, determinants of the levels of giving, and the costs and benefits

of giving.



INTRODUCTION


The purpose of this paper is to test the hypothesis that benefits, in the form of increased market value of shares,

are created for shareholders from the financial support of political parties and candidates. This hypothesis

comes from the application of a concept introduced by Hertzel, Martin and Meschke (HMM) in their paper

Corporate Soft Money Donations and Firm Performance. They state, "Managers of publicly traded corporations are

to invest in tangible and intangible assets to increase the wealth of their shareholders (1), " and that one

such intangible is political influence. If this is true, one would expect firms to create additional value for

shareholders from political donations.



Since markets are expected to be reasonably efficient, they generally reflect all publicly available information. If

this is the case, and a company supports one party, which is expected to win (or lose) an election (e.

g. Congressional, Presidential, etc.), it is reasonable to believe that the firm's equity value should accrue

some additional benefits from supporting the victorious party. In other words, the market should recognize the

firm's 'investment' in political influence and discount back (i.e., find the present value of) any additional benefits

that could result from the firm's support.







Such excess returns are important to understand because of the implications. Perhaps the most important

implication is that if this belief is true, then managers clearly have a fiduciary duty to shareholders to invest as

much as possible in political relationships as long as there is a sufficient return. This means firms should not

'waste' their donations on non-profitable ventures (i.e. candidates and parties) with which they believe they

can accomplish nothing. This also means that one would expect companies to invest more and greater amounts

in profitable ventures. The effects on politicians are clear. If a firm views your relationship as beneficial to them,

they will continue to support you and in ever-greater amounts. If the relationship is not beneficial, then the

company will end the venture and salvage as much as they can from it before moving on to a more profitable

venture (e.g. another politician, primary- or general-election candidate, etc.).



With this in mind, it becomes apparent that shareholders should be aware of the 'political premium' (the

financial benefits gained from political donations) their equity could earn in the event of a successful election for

the party their firm supports. To determine whether a premium exists and how much this premium is worth

to shareholders, a study was performed using various data resources, including daily stock and S&P 500 returns

from the Center for Research on Security Prices (CRSP), and the Iowa Electronic Markets (IEM) (a futures

market where contract prices are determined by political outcomes). Analysis of this data supports the

conclusion that corporate campaign contributions have little, if any, impact on the return to shareholders.



The study will be accomplished as such: Section II will give background on the issue of corporate

campaign contributions and will expand on issues such as who gives, why they give, costs and benefits, and

whether personal preferences of managers affect giving behavior. Section III will describe the data used in the

study, Section IV will discuss the methodologies employed and the results, Section V discusses implications,

and Section VI will summarize the information, conclude the study, and provide guidance for future studies.



BACKGROUND



Corporations make political donations in a variety of ways. These include political action committee (PAC) funds,

"soft-money" (legal until 2002), "hard-money " (2), and bundled funds(3) that are given to candidates raising

funds. The fund-raising process occurs year round and is not just during 'election season': for example,

US Congressmen usually begin raising funds for their re-election as soon as they obtain office. Politicians

generally appreciate corporate donations because they help them either gain office or maintain their current

position. Additionally, in the case of incumbents, these campaign funds pose formidable barriers against

competition. Such resources act as a hurdle because they can provide for a wide range of products and

services. These include marketing materials (e.g. television ads, direct mail, targeted phone calls), polling, and

get-out-the vote efforts. Such products and services are crucial in determining election outcomes and

give incumbents a considerable advantage over their opposition.



Although politicians undoubtedly appreciated such donations, critics question the ethics and reasoning behind





the giving. Many continue to view the vast amounts of money going into political coffers by large corporations

as payment for services rendered and/or future favors. An often-cited example comes from the now defunct

Enron.: Enron donated over $6.5 million between 1989 and 2004 and in the 2000 election cycle the vast majority

of its donations went to Republicans (4). Several critics viewed the appointment of several current and former

Enron employees to important positions within the energy industry, the deregulation of certain markets, and

counsel in legislative formation, as clear evidence that political influence was being bought (5). Such

behavior, coupled with the cost of the 2000 election (over a billion dollars [6]), led to a call for change.



With the passage of the 2002 Bipartisan Campaign Reform Act, "soft-money" (unlimited campaign contributions

to political parties) was banned and several other laws (e.g. new contribution limits, advertising regulations,

etc.) were put into place with the goal of significantly reducing the amount of "corporate" money and influence

in elections (7). It is clear from the enactment of these laws that many believed the structure of campaign

finance unfairly favored corporations, that politicians were beholden to 'special interests', and that this

was unacceptable (8). Although this was generally believed, it had not been proved.



Who Gives?


327 of the 500 firms that make up the S&P 500 gave donations to politicians directly through their PAC in the

last election cycle, and probably even more gave when individual executives are accounted for (9). The number

may increase when you take into account that some firms make their political donations through industry groups

that represent firms in a particular industry (10). These firms are in every industry and have a broad range in size

(e.g. employees, revenues, etc.). Even though donors come from a broad range of industries, as shown in Table

1 the largest givers tend to be in highly regulated industries (11). For example, financial services firms (e.

g. commercial and investment banks, insurance companies, etc.) are highly regulated. The rules that govern

their industry have a direct and sizeable impact on market opportunities available to the firms, costs the firms

have to pay, revenue opportunities, and the overall profitability of the firms. Additionally, policies the

government pursues have a substantial impact on the economic environment firms in the industry might

encounter. For example, if the government decides to run massive deficits causing interest rates to rise, this

would clearly have an impact on the financial services industry. As a result, 14 of the top 100 political donors

are financial services firms. If one were to consider only corporations in the top 100, these firms make up 37.8%

of the firms.



Table 1
Top Ten Industries (in Millions)

Rank Industry Total

1 Lawyers / Law Firms $73.7

2 Retired $68.8

3 Securities / Investment $57.8

4 Real Estate $49.9






5 Insurance $30.4

6 Health Professionals $28.3

7 TV / Movies / Music $24.9

8 Computers / Internet $23.9

9 Oil & Gas $22.8

10 Business Services $20.8

These are the top ten industries by total amounts given. The largest
corporate givers tend to be in highly regulated industries.
* Center for Responsive Politics


Other highly regulated industries that tend to give include the tobacco, energy, pharmaceutical,

defense, entertainment, communications, and transportation industries.



Why Give?


Corporations tend to give for several reasons but the biggest reason is quite clear: a desire to influence matters

that are important to the firm or to the firm's managers (12). For example, when deregulation took place in

certain sub sectors of the energy industry, firms believing deregulation to be in their best interest

significantly increased the amounts donated to politicians. Additionally, they also increased their lobbying spending

to provide additional pressure on politicians to do the things that they proposed (13). Political influence can

take several forms. Two of the most common ways are through policy formation, including favorable writing of

laws, and agenda setting (14).



When writing policy there are several things that must be considered including the overall goal of the law, the

effect the law will have on both direct and indirect parties, and the winners and losers created as a result of

the policies. When laws are written, corporations want to be on the winning side and they can accomplish this

by influencing the language and details within legislation. This is accomplished mainly through the relationships

that are established by, and reinforced through, campaign contributions (15). When sizeable donations are

made, many candidates/politicians are known to take one-on-one meetings with large donors to listen to

their concerns (16) . During this time, one can expect corporate representatives (e.g. CEO's, lobbyist, etc.) to

voice their concerns and preferences on specific items of interest. In fact many have been known to even

offer suggestions or guidelines for how the laws should be written or applied (17). The theory of 'investing' in

the political process leads one to believe that if politicians do an acceptable job in forming policies and/or

legislation favorable to firms, then the politicians can expect future support. If they are unsuccessful, support may

be diminished or passed on to an opponent in a future election.



Agenda setting is another important way in which corporations wish to have influence. Agenda setting is the ability

to have issues important to the firms become a focus of public debate. For example, some argue that the

current Bush Administration's emphasis on an Energy bill and the President making it one of his priorities, is simply

a reflection of his ties and duties to the energy industry (18). Agenda setting is also important because there





are issues that many corporations would prefer not to be part of the public debate; actions that they would

rather accomplish under the radar. By having an impact on topics that are and are not discussed in public, firms

are better able to address their needs. If they believe public sentiment is on their side, they try to get things out

in public debate. If public sentiment is against them, they try to have things done quietly.



Some studies suggest that political donations don't change politicians, but are simply a reflection of a

politician's already stated interests (19). For example, if a politician's stance on trade was protectionism (e.g.

high tariffs, quotas, and other non-tariff barriers), and if a firm saw this viewpoint as being in their best interest,

they typically would support the candidate.



Regardless of the type of influence exerted, firms give because they wish to have some control over situations

that could be either beneficial or detrimental to the firm's success. They have influence because even

though politicians are supposed to represent the interests of the their constituents, they are much more likely

to listen to the concerns of their large donors, the ones who help them attain and maintain their position.



What Determines The Amount Given?


There is no one particular formula that determines how much money corporations will donate to politicians,

however, several general guidelines can be established. The first thing that should be considered is the size of

the firm. This is important because company PAC funds are raised from employees of the firm. As a result,

larger firms typically have more funds to donate through their PAC. Additionally, larger firms tend to have

more people who can make larger personal donations. For example, a firm with 100,000 people typically will have

a larger number of employees who can max out personal donations to candidates than a firm with 100

employees. When coupled with the greater availability of PAC funds, larger firms generally contribute more.



Another important consideration is the firm's industry. As previously stated, highly regulated industries tend to

have higher levels of political donations. Firms in these industries tend to give more because, by obtaining

influence, they hope to consistently improve the regulatory environment in which they operate. Additionally,

the impact on these firms tends to be much more noticeable than in other areas, such as consumer goods.



Perceptions of what is at stake also tend to drive the amounts given. Generally speaking, if a firm believes more is

at stake, they typically will donate more funds. For example, if a firm is in the pharmaceutical industry and

believes substantial changes in patent law will take place in the next legislative session, it is more likely to donate

to the candidate who will support a position most favorable to the firm.



The length of a relationship is also important when determining how much to give. It can be expected that the

longer there has been an established relationship, the greater the likelihood of a larger sum being donated.



Another important factor is the importance of the politician. Politicians in leadership positions, like the





President, Majority Leader, or Chairman, tend to receive more and larger donations. Additionally, politicians who

have more power over the issue areas of importance to the firm tend to receive larger amounts and more

donations in general: chairmen of relevant committees tend to receive more campaign contributions than

non-chairmen. If a firm is donating to these politicians, they would tend to give larger amounts and the

donations would tend to be more frequent.



There are several other factors that affect the amount given. These include the party of the politician (20),

the politician's constituency (21), prior personal relations (22), and legal limits to donations (23).



Costs vs. Benefits


Firms are banned from directly contributing to political campaigns. Instead, they usually exert their influence

through Company PAC's, as well as individual donations. Company PAC's must submit statements to the

Federal Election Committee noting every donation they make. When this amount is added to individual

contributions and lobbying costs, an estimate is derived for the cost to companies for political involvement.

However, it must be made very clear that other than lobbying, there are no direct costs to the firm:

individuals contribute their own money to candidates and the PAC and, therefore, it is not a direct company

expense. Secondly, even if PAC donations were a direct expense of the firm, they would be nominal when

compared to other expenses. For example, in the 2002 election cycle, the Altria Group donated over $4 million

from its PAC, management, and employees (24). While this might seem large in absolute terms, for a company

that at the time had over $80 billion in revenues, and $11 billion in profit (25), this represents a paltry sum.



When these costs are compared to the potential benefits, it is clear that political donations can provide for

substantial returns and, therefore, it is probably in the best interest of firms to make political donations. By

making donations, firms at the very least have an open ear and sometimes one-on-one time to make their case.

If they don't make donations they lose this ability to have a direct line and, in a sense, leave completely to

chance changes in policy that could significantly affect the firm.



Personal Interests vs. Corporate Interests


Most companies have given overwhelmingly to Republicans (see Table 2). This is because the GOP is

generally viewed as the pro-business party. Even though this is the case, the question arises as to whether or

not political donations are a reflection of the personal preferences of managers and, if so, are they in the

best interest of shareholders. This question arises because the firm's management determines the recipients of

PAC donations, as well as how much will be donated.



Table 2
Donors, Symbols, Total Amount Given, Percent to Democrats and
Republicans

Organization Name icker Total DEM REP






Altria Group

FedEx

Goldman Sachs

AT& T

United Parcel Service

Citigroup Inc

Time Warner

SBC Communications

Microsoft Corp

Verizon Communications

JP Morgan Chase & Co

BellSouth Corp

Lockheed Martin

Morgan Stanley

Bank of America

General Electric

Union Pacific Corp

Merrill Lynch

AFLAC Inc

MBNA Corp

Boeing Co

Pfizer Inc

Chevron Texaco

Freddie Mac

UST Inc

Walt Disney Co

General Motors

Anheuser-Busch

Exxon Mobil

Archer Daniels Midland

American International Group

General Dynamics

Southern Co

Metropolitan Life

CSX Corp

Eli Lilly & Co

Bristol-Myers Squibb


MO $20,935,067 37

FDX $20,874,988 34

GS $20,015,792 56

T $19,672,908 47

UPS $17,645,995 29

C $17,605,641 52

TWX $14,120,917 75

SBC $13,625,895 33

MSFT $13,319,470 59

VZ $12,978,611 39

JPM $12,852,861 51

BLS $12,849,142 42

LMT $11,981,114 39

MWD $11,734,562 39

BAC $10,937,570 46

GE $10,909,580 43

UNP $10,626,845 20

MER $10,396,350 27

AFL $10,225,820 37

KRB $9,963,331 26

BA $9,111,478 45

PFE $9,075,591 34

CVX $8,794,424 17

FRE $8,537,619 73

UST $8,504,152 18

DIS $8,389,245 69

GM $8,345,759 36

BUD $8,170.034 44

XOM $7,828,733 11

ADM $7,711,339 39

AIG $7,688,152 54

GD $7,675,091 42

SO $7,389,392 20

MET $6,897,253 52

CSX $6,891,830 26

LLY $6,721,141 29

BMY $6,458,777 27






This table shows the top 37 companies by total amount given. As seen here, most firms have given
the majority of their funds to Republicans however ina II cases a portion is still given to Democrats.


HMM note in their paper that there are three groups that potentially benefit from political donations:

politicians, managers, and shareholders. Much study has been done on the effects of donations for politicians

(26). There is only a small literature that explores the impact of political donations on managers and

shareholders. One study by Gupta and Swenson, which studied the effects of a major tax law change in 1984,

found that a firm's PAC contributions, and individual manager's campaign contributions, were both

positively correlated with the tax benefits at stake for the firm (27). In other words, PAC and personal donations

by management seem to support the assertion that managers' actions are aligned with shareholder interests.



There are still critics who point to examples of managers supporting a candidate for social issues that are

irrelevant to the overall success of the firm. However such occurrences seem to be the exception not the norm,

and on the aggregate it seems firms typically do make donations to address their interests or to support those

whom have a vested interest in the industry (e.g. former executives). In fact, when Republicans took control of

the house in 1994, and later on the Senate, donations shifted heavily to the GOP (28). This supports the

assertion that large corporations are pragmatic donors and give when and where necessary (29).



DATA AND VARIABLE DEFINITIONS



Data


In a perfect world, it would be ideal to obtain a corporate PAC's list of donations, management's donations,

their political affiliations, and all employee donations, and then analyze this data in relation to polling data of

the relative strength of the two major political parties. In reality, this is not practical because such information is

not easily found. For example, all donors to campaigns must list their job title and corporate affiliations,

however, they rarely do so, usually only listing their general occupation (30). Additionally, polling information is

not typically released on a daily basis and normally only tracks one candidate against another, not the

relative strength of one party over the other. To address these shortcomings, we have used several proxies in

an attempt to answer whether corporate campaign contributions enhance shareholder wealth.



Donations to political parties are often difficult to track, however, they can normally be found via tracking through

the Federal Election Commission (FEC). The data provided from the FEC is very difficult to decipher, but

several interest groups have simplified the data into much more user-friendly versions. Perhaps the most well know

is the Center for Responsive Politics (CRP). The CRP maintains extensive databases on political donations,

including profiles and background information on donors, the recipients of funds, the type of funds donated (e.g.

PAC funds, "soft-money", "hard-money", bundled funds, etc.), and aggregate totals. The CRP also maintains a

listing of the top 100 donors since its inception in 1989. Thirty-seven of the top 100 donors are members of the

S&P 500. These firms will make up our sample group: Table 2 lists the 37 firms, their ticker symbol, the

total amount donated, and the percentage given to each party.








The S&P 500 is a market-capitalization (number of shares outstanding times the share price) -weighted index

that tracks the performance of the 500 largest US firms. This index provides a broad overview of US

market conditions because it encompasses several broad sectors. Since our sample contains firms from

many different sectors (e.g. agriculture, consumer products, energy, financial services, etc.) the S&P will provide

a good proxy for the market. Returns for the S&P 500 were retrieved using the Center For Research In Security

Prices (CRSP). Stock data including, raw return, beta-excess return and holding period return for the 37

companies was retrieved using the same service.



Since it is extremely difficult to find daily polling data from the major pollsters (e.g. Zogby, Gallup, CNN, etc.)

the Iowa Electronic Markets (IEM) have been used instead. The IEM are a "...small-scale, real-money futures

markets where contract payoffs depend [on] political events such as elections. (31)" Using the IEM, participants

can trade "shares" of political candidates or parties with the final return dependent upon the outcome of the

election. Markets include a "winner-takes-all" and "vote-share" market. The main difference between these

two markets is the winner takes all market tries to predict the ultimate winner in an election while a "vote

share" market predicts the percentage of votes each candidate will receive. The IEM is extremely effective

at predicting outcomes, especially in the case of the vote share market in which there is an average error of

only 1.3% (32).



Historical daily closing prices from the 2000 presidential, winner-takes-all market will be used for the analysis.

This provides 137 observations per contract. These contracts reflect the IEM market sentiment as to which

candidate will win the Presidential election. The Presidential election was used because this branch of government

has the most influence in agenda setting and policy formation, arguably two of the most important areas

for corporations.



Variable Definitions


R = ( Pt - Pt-1 )/ Pt-1



For this analysis, we define the following variables: return, R, is calculated as today's price (Pt) minus the prior

day's price (Pt-1), divided by the prior day's price (Pt-1). This is the calculated return for all companies, the S&P

500, and the IEM data. The returns for all firms and the S&P 500 do not assume the reinvestment of dividends.



METHODOLOGY AND RESULTS



According to the CRP, the top 100 donors have given over $1 billion in federal election campaigns from 1989

to October 2004. The 37 companies we track have given over $417 million. The top 100 donors give slightly

more money to Democrats than to Republicans due to the presence of several large unions. Although Democrats




hold a slight lead in funds from the top 100 donors, this began to change when Republicans won control of the

house in 1994 and later on gained control of the Senate (33). Large corporations, such as the ones tracked in

our sample, have shown a sort of pragmatism in their giving and have shifted much of their donations to

Republicans (34). The trend has also seen large increases in the absolute amount corporations donate. As a

result (see Table 2), 28 of the 37 companies in the sample have given over half of their donations to Republicans.



Many factors affect the price of a stock. In order to determine the effects of political affiliation with respect to

returns, we calculate return to be:



R = a + B1(S&P500) + B2(IEM) + r



Where a = intercept of the returns, B1 = beta of the stock to the S&P 500 index, B2 = beta of the stock in relation

to the Iowa Electronic Market data, and n = error adjustment. By determining b2, we are able to see the effects

of the firm's affiliation to either political party. In determining the effects on company stock we have accounted

for the effects of the market in order to isolate the effects from outside factors. One would expect companies

who donate a majority of funds to Republicans to have a positive B2 when regressed against Republican

IEM contracts. This would lead to better returns when there are increases in contract prices for Republicans

and decreases in contract prices for Democrats. However, since this formula is related to the capital asset

pricing model (CAPM), it suffers from some of the same limitations as the original formula.



The sample for this experiment consists of the 37 publicly traded companies that are named in the CRP 100 top

all-time donors list. After finding the daily company returns for the same 137 periods covered by the Iowa

election markets, they were regressed using the formula above. Tables 3 and 4 show B2 when this process

is undertaken for each contract. The data is not consistent with the hypothesis that a firm should have a positive

B2 when regressed against the contract for the party which it donates more money to (35).



Table 3
Democrat Percentage, Iowa Electronic Market Beta, and T-Stat

Organization Name Ticker REP 2 T STAT

Time Warner TWX 75% 0.022 0.801

Freddie Mac FRE 73% -0.014 -0.379

Walt Disney Co DIS 69% -0.019 -0.554

Microsoft Corp MSFT 59% -0.004 -0.192

Goldman Sachs GS 56% -0.018 -0.806

American International Group AIG 54% 0.008 0.205

Citigroup Inc C 52% 0.013 0.471

Metropolitan Life MET 52% -0.003 -0.110

JP Morgan Chase & Co JPM 51% -0.006 -0.308

AT&T T 47% 0.033 1.153






Bank of America BAC 46% 0.018 0.796

Boeing Co BA 45% 0.019 0.404

Anheuser-Busch BUD 44% -0.014 -0.455

General Electric GE 43% 0.018 0.747

BellSouth Group BLS 42% 0.018 0.682

General Dynamics GD 42% 0.008 0.223

Verizon Communications VZ 39% -0.019 -0.562

Lockheed Martin LMT 39% -0.025 -0.690

Morgan Stanley MWD 39% -0.005 -0.174

Archer Daniels Midland ADM 39% -0.008 -0.343

Altria Group MO 37% -0.009 -0.311

AFLAC Inc AFL 37% 0.008 0.265

General Motors GM 36% 0.020 0.573

FedEx Corp FDX 34% -0.002 -0.063

Pfizer Inc PFE 34% 0.045 1.411

SBC Communications SBC 33% 0.048 1.612

United Parcel Service UPS 29% 0.009 0.289

Eli Lilly & Co LLY 29% 0.060 1.695

Merrill Lynch MER 27% 0.024 0.664

Bristol-Myers Squibb BMY 27% -0.011 -0.492

MBNA Corp KRB 26% -0.004 -0.127

CSX Corp CSX 26% 0.026 0.816

Union Pacific Corp UNP 20% 0.041 1.292

Southern Co SO 20% -0.006 -0.230

UST Inc UST 18% 0.003 0.065

ChevronTexaco CVX 17% 0.009 0.269

Exxon Mobil XOM 11% 0.031 1.007

This table shows the beta that corresponds to the IEM data and the corresponding t-stat. There are
no statistically significant outcomes. Additionally there appears to be no trend in the Beta.







Table 4
Republican Percentage, Iowa Electronic Market Beta, and T-Stat

Organization Name Ticker REP 2 T STAT

Time Warner TWX 24% -0.003 -0.014

Freddie Mac FRE 26% -0.042 -0.994

Walt Disney Co DIS 30% -0.037 -0.893






Microsoft Corp MSFT 39% 0.011 0.340

Goldman Sachs GS 42% -0.012 -0.389

American International Group AIG 45% -0.047 -1.063

Citigroup Inc C 47% -0.050 -1.151

Metropolitan Life MET 47% -0.042 -1.127

JP Morgan Chase & Co JPM 48% 0.027 0.932

AT & T T 52% 0.038 0.893

Bank of America BAC 53% -0.013 -0.346

Boeing Co BA 54% 0.009 0.218

Anheuser-Busch BUD 55% -0.004 -0.091

General Electric GE 56% 0.030 0.631

BellSouth Group BLS 57% 0.010 0.265

General Dynamics GD 57% 0.027 0.478

Verizon Communications VZ 59% -0.012 -0.359

Lockheed Martin LMT 60% 0.005 0.133

Morgan Stanley MWD 60% 0.019 0.459

Archer Daniels Midland ADM 60% 0.006 0.162

Altria Group MO 62% 0.039 1.028

AFLAC Inc AFL 62% -0.005 -0.186

General Motors GM 63% -0.053 -1.850

FedEx Corp FDX 65% 0.048 1.328

Pfizer Inc PFE 65% 0.011 0.353

SBC Communications SBC 66% -0.031 -1.019

United Parcel Service UPS 70% -0.009 -0.369

Eli Lilly & Co LLY 70% -0.015 -0.364

Merrill Lynch MER 71% -0.001 -0.035

Bristol-Myers Squibb BMY 71% 0.030 0.887

MBNA Corp KRB 72% -0.070 -2.003

CSX Corp CSX 72% -0.040 -1.253

Union Pacific Corp UNP 78% -0.018 -0.508

Southern Co SO 79% -0.013 -0.351

UST Inc UST 81% -0.009 -0.326

ChevronTexaco CVX 82% -0.020 -0.601

Exxon Mobil XOM 87% -0.031 -0.940

This table shows the beta that corresponds to the IEM data and the corresponding t-stat. There are
no statistically significant outcomes. Additionally there appears to be no trend in the Beta.


Following these regressions, portfolios were formed dependent upon companies percentages donated to the

political parties. Four portfolios were formed: Strong Democrats (SD), Strong Republicans (SR), Weak






Democrats (WD) and Weak Republicans (WR). "Strong" portfolios are companies that have given over 60% of

their overall donations to either Democrats or Republicans, while "Weak" portfolio members give 50-60% of

their donations to a party. Assuming all stocks were weighted equally, a portfolio return was derived and

then regressed against the S&P 500, and IEM contract prices for both parties. Table 5 summarizes the B2 for

these portfolios. This analysis produced only one statistically significant and interesting result: Weak

Republicans react negatively to improvements of Republicans in the IEM. If this were the case, why then

would managers continue to support the party in question? One hypothesis is that corporate donations reflect

the political preferences of management.



Table 5
Portfolio IEM Contract Betas and T Stats

DEM REP

Portfolio 2 T STAT 2 T STAT

Strong Democrats 0.020 0.368 -0.033 -0.499

Weak Democrats -0.005 -0.053 0.012 0.112

Weak Republicans 0.263 2.199 -0.276 -1.929

Strong Republicans 0.088 0.489 0.015 0.072

This table shows the betas and t stats for equal weight portfolios created from the top 37 corporate
donors. The only statistically significant result is from the Weak Republicans portfolio. This portfolio
appears to have a positive relationship with the Democratic IEM contract and a slightly negative
relationship with the Republican IEM contract.


The third analysis involves correlating portfolio returns to IEM contact returns. This would determine the direction

and strength of relationship, if any, between the returns of the members of the portfolio and the returns on the

IEM contract. One would expect there to be a strong positive correlation between the returns for firms

strongly supporting one party and the returns on the IEM contract (36). This however is not the case. Table

6 summarizes the correlation data and shows that all portfolios have a negative correlation to the Republican

winner-takes-all contract in the IEM. This too would support the hypothesis that donations from corporations

reflect the political preferences of managers and are not necessarily "investments" for the firm.



Table 6
Correlations

Portfolio DEM REP

Strong Democrats 0.014 -0.044

Weak Democrats -0.017 -0.003

Strong Republicans 0.028 -0.013

Weak Republicans 0.124 -0.132

This table shows the correlation coefficients between the portfolios and the IEM contracts. All
portfolios are negatively correlated with


ANALYSIS OF RESULTS AND IMPLICATIONS








The results of this study seem to suggest that shareholders receive no additional monetary benefits from a

firm's support of one political party or the other. This is of great significance because if shareholders receive

no additional benefit, then companies should refrain from making political donations. There are several

possible reasons why there appears to be no additional financial benefit that shareholders gain from political

support. The most likely reason is that it is difficult to estimate the economic benefits that firms will receive

from their support of political parties. As a result, investors and traders find it difficult to discount these benefits

and, therefore, political outcomes have no material impact on the price per share.



Of particular interest is the correlation data. This data reveals that all firms have a slight negative correlation

to Republican contracts. In other words this data suggests that when markets believe republicans will win

the election, all security prices, regardless of which party the company supports, goes down. This is

interesting because the majority of corporate campaign contributions go to Republicans. Given this, one would

expect there to be at least a slight positive correlation between the Republican IEM contracts and the SR and

WR portfolios, but this clearly is not the case. In other words, even though there is a converse relationship

with returns to shareholders and the general belief that Republicans will win the election, managers continue

to 'invest' in Republicans to the detriment of shareholders. This study would support the hypothesis that

political donations are a reflection of the personal preferences of management, and are not necessarily in the

best interest of shareholders.



Another implication of this study is that the market might not properly adjust for political risk. In other words,

the markets might not be efficient when it comes to addressing the impact political environments can have

on businesses.



CONCLUSION



In this study we investigated the question whether corporate campaign contributions enhance shareholder

wealth, under the assumption provided by HMM that these donations are like investments and that managers

expect a positive payoff in the future. In order to accomplish this, we performed multiple regressions and

correlation studies of the top 37 corporate donors over the past 15 years with data from CRSP and from the

Iowa Elections Market, a futures market that allows traders to buy shares in political outcomes.



While the conclusion is not completely clear, the evidence seems to indicate that corporate campaign

contributions are not necessarily considered investments for the firm by the market. The statistically

insignificant outcomes, general trends, and correlation studies all seem to say the same thing: corporate

campaign contributions do not serve to enhance the shareholder wealth and could potentially reflect the

personal preferences of the management of the firm.





With this knowledge, the analyses performed in this study are of high importance to investors as they should

be interested in whether these donations are actually useful investments for the firm. Further analysis could

be performed using industry specific indexes. Additionally, the study could be expanded to include all members of

the S&P 500 to determine whether the statement holds true for all publicly traded firms who make political donations.






REFERENCES



1. Hertzel, M; Martin, J and Meschke J. (2002). Corporate Soft Money Donations and Firm Performance. Arizona

State University (Google Scholar) 1-24 Back

2. These are funds donated directly to candidates from individuals. This contribution limit was raised to $2000 in

2002. Back

3. Bundled funds are donations where fundraisers will gather the donations of multiple donors and send them in

to candidates and parties at one time. Bundled funds are known to be as high as $100,000 or more (CRP). Back

4. Center For Responsive Politics, Top All Time Donor Profiles, http://www.opensecrets.org/orgs/list.asp?order=A Back

5. Weisskopf, Michael. "Enron's Democrat Pals" Time; 8/26/2002, Vol. 160 Issue 9, p20, 1/2p, Ic Back

6. Center For Responsive Politics, http://www.opensecrets.org/bigpicture/index.asp Back

7. Dionne Jr., E. J., MONEY & ELECTIONS, Commonweal, 4/9/2004, Vol. 131 Issue 7, p8, 1p Back

8. Hertzel, M; Martin, J and Meschke J. (2002). Back

9. Center For Responsive Politics, Political Action Committees, http://www.opensecrets.org/pacs/index.asp Back

10. For example, some industry groups such as the American Bankers Association (ABA) count as members

financial services firms. The ABA receives its funding from these institutions and makes donations as a

industry representative. When such groups are considered, the number of donating firms probably

increases considerably. Back

11. Center For Responsive Politics, Top Industries Through The Years, http://www.opensecrets.org/pubs/

whospay00/industrychange.asp Back

12. Hertzel, M; Martin, J and Meschke J. (2002). Back

13. Weisskopf, Michael. "Enron's Democrat Pals" Time; 8/26/2002, Vol. 160 Issue 9, p20, 1/2p, Ic Back

14. Hertzel, M; Martin, J and Meschke J. (2002). Back

15. Center For Responsive Politics, "Cashing In: A Guide to Money, Votes, and Public Policy in the 104thCongress",

http://www.opensecrets.org/pubs/cashingin_104th/04intro.html Back

16. Not ducking , Economist, 00130613, 3/27/2004, Vol. 370, Issue 8368 Back


17. Ibid. Back







18. Ibid. Back


19. Magee, C. (2000). Do Political Action Committee's Give Money To Candidates For Electoral or Influence

Motives? Public Choice 11:372-399 Back

20. Republicans are generally viewed as more business friendly and as a result generally receives more and

larger donations from corporations. Back

21. The state that the politician represents can have a huge impact on the sources and levels of political donations.

For example, politicians from Texas generally have backing from energy and energy services firms native to

the state. Back

22. A great example of this comes from former Goldman Sachs Chairman and current New Jersey Senator, John

Corzine. When running for the US Senate, the firm raised millions of dollars internally to support his candidacy

and continues to support his campaigns financially. Generally speaking, if politicians have corporate ties (e.g.

a former executive of a firm, one could expect a larger amount of donations. Back

23. Multi-candidate PAC's can give $5000 to individual candidates, $15,000 to national parties, and $5000 to any

other PACS or state parties (Center For Responsive Politics. "Federal Campaign Finance Law: Contribution

Limits" http://www.opensecrets.org/basics/law/index.asp Back

24. Center For Responsive Politics, Altria Group Donor Profile http://www.opensecrets.org/orgs/summary.

asp?ID=D000000067&Name=Altria+Group Back

25. Annual Report. Income Statement, http://finance.yahoo.com/q/is?s=MO&annual Back

26. Hertzel, M; Martin, J and Meschke J. (2002). Back

27. Ibid. Back

28. The Center For Responsive Politics www.opensecrets.org Back

29. Ibid. Back

30. Hertzel, M; Martin, J and Meschke J. (2002). Back

31. "What Is the IEM?" http://www.biz.uiowa.edu/iem/media/summary.html Back

32. Ibid. Back

33. The Center For Responsive Politics, www.opensecrets.org Back

34. Ibid. Back

35. If Company A donates 65% to Republicans, when regressed against the Republican contract in the IEM, one

would expect it to have a positive B2. Back

36. For example, one would expect returns on the Strong Democrats portfolio to have a strong positive correlation

with the returns on the IEM winner-takes-all Democrat contract. Back







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Journal of Undergraduate Research Volume 6, Issue 8 July/August 2005 Publicly Traded Companies and Political Donations: Do Corporate Campaign Contributions Enhance Shareholder Wealth? Marvin McTaw ABSTRACTThis paper analyzes the relationship between donations given to political parties and candidates (i.e. Republicans and Democrats), and the stock returns of corporations who make the donations, in an attempt to determine the value created for shareholders through political donations. Using daily stock returns, S&P 500 returns, and Iowa Electronic Markets data (A futures market whose contract prices are determined by political outcomes), multiple regression analysis and correlation studies were performed. All studies come to the same conclusion: there is no statistical evidence that suggests shareholders receive any returns from political support. Implications, including the possibility that political donations are simply the reflection of management are discussed. Analysis is also performed on who gives, why firms give, determinants of the levels of giving, and the costs and benefits of giving.INTRODUCTIONThe purpose of this paper is to test the hypothesis that benefits, in the form of increased market value of shares, are created for shareholders from the financial support of political parties and candidates. This hypothesis comes from the application of a concept introduced by Hertzel, Martin and Meschke (HMM) in their paper Corporate Soft Money Donations and Firm Performance. They state, Managers of publicly traded corporations are to invest in tangible and intangible assets to increase the wealth of their shareholders (1), and that one such intangible is political influence. If this is true, one would expect firms to create additional value for shareholders from political donations. Since markets are expected to be reasonably efficient, they generally reflect all publicly available information. If this is the case, and a company supports one party, which is expected to win (or lose) an election (e. g. Congressional, Presidential, etc.), it is reasonable to believe that the firms equity value should accrue some additional benefits from supporting the victorious party. In other words, the market should recognize the firms investment in political influence and discount back (i.e., find the present value of) any additional benefits that could result from the firms support.

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Such excess returns are important to understand because of the implications. Perhaps the most important implication is that if this belief is true, then managers clearly have a fiduciary duty to shareholders to invest as much as possible in political relationships as long as there is a sufficient return. This means firms should not waste their donations on non-profitable ventures (i.e. candidates and parties) with which they believe they can accomplish nothing. This also means that one would expect companies to invest more and greater amounts in profitable ventures. The effects on politicians are clear. If a firm views your relationship as beneficial to them, they will continue to support you and in ever-greater amounts. If the relationship is not beneficial, then the company will end the venture and salvage as much as they can from it before moving on to a more profitable venture (e.g. another politician, primaryor general-election candidate, etc.). With this in mind, it becomes apparent that shareholders should be aware of the political premium (the financial benefits gained from political donations) their equity could earn in the event of a successful election for the party their firm supports. To determine whether a premium exists and how much this premium is worth to shareholders, a study was performed using various data resources, including daily stock and S&P 500 returns from the Center for Research on Security Prices (CRSP), and the Iowa Electronic Markets (IEM) (a futures market where contract prices are determined by political outcomes). Analysis of this data supports the conclusion that corporate campaign contributions have little, if any, impact on the return to shareholders. The study will be accomplished as such: Section II will give background on the issue of corporate campaign contributions and will expand on issues such as who gives, why they give, costs and benefits, and whether personal preferences of managers affect giving behavior. Section III will describe the data used in the study, Section IV will discuss the methodologies employed and the results, Section V discusses implications, and Section VI will summarize the information, conclude the study, and provide guidance for future studies.BACKGROUNDCorporations make political donations in a variety of ways. These include political action committee (PAC) funds, soft-money (legal until 2002), hard-money (2), and bundled funds(3) that are given to candidates raising funds. The fund-raising process occurs year round and is not just during election season: for example, US Congressmen usually begin raising funds for their re-election as soon as they obtain office. Politicians generally appreciate corporate donations because they help them either gain office or maintain their current position. Additionally, in the case of incumbents, these campaign funds pose formidable barriers against competition. Such resources act as a hurdle because they can provide for a wide range of products and services. These include marketing materials (e.g. television ads, direct mail, targeted phone calls), polling, and get-out-the vote efforts. Such products and services are crucial in determining election outcomes and give incumbents a considerable advantage over their opposition. Although politicians undoubtedly appreciated such donations, critics question the ethics and reasoning behind

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the giving. Many continue to view the vast amounts of money going into political coffers by large corporations as payment for services rendered and/or future favors. An often-cited example comes from the now defunct Enron.: Enron donated over $6.5 million between 1989 and 2004 and in the 2000 election cycle the vast majority of its donations went to Republicans (4). Several critics viewed the appointment of several current and former Enron employees to important positions within the energy industry, the deregulation of certain markets, and counsel in legislative formation, as clear evidence that political influence was being bought (5). Such behavior, coupled with the cost of the 2000 election (over a billion dollars [6]), led to a call for change. With the passage of the 2002 Bipartisan Campaign Reform Act, soft-money (unlimited campaign contributions to political parties) was banned and several other laws (e.g. new contribution limits, advertising regulations, etc.) were put into place with the goal of significantly reducing the amount of corporate money and influence in elections (7). It is clear from the enactment of these laws that many believed the structure of campaign finance unfairly favored corporations, that politicians were beholden to special interests, and that this was unacceptable (8). Although this was generally believed, it had not been proved. Who Gives? 327 of the 500 firms that make up the S&P 500 gave donations to politicians directly through their PAC in the last election cycle, and probably even more gave when individual executives are accounted for (9). The number may increase when you take into account that some firms make their political donations through industry groups that represent firms in a particular industry (10). These firms are in every industry and have a broad range in size (e.g. employees, revenues, etc.). Even though donors come from a broad range of industries, as shown in Table 1 the largest givers tend to be in highly regulated industries (11). For example, financial services firms (e. g. commercial and investment banks, insurance companies, etc.) are highly regulated. The rules that govern their industry have a direct and sizeable impact on market opportunities available to the firms, costs the firms have to pay, revenue opportunities, and the overall profitability of the firms. Additionally, policies the government pursues have a substantial impact on the economic environment firms in the industry might encounter. For example, if the government decides to run massive deficits causing interest rates to rise, this would clearly have an impact on the financial services industry. As a result, 14 of the top 100 political donors are financial services firms. If one were to consider only corporations in the top 100, these firms make up 37.8% of the firms. Table 1 Top Ten Industries (in Millions) Rank Industry Total 1 Lawyers / Law Firms $73.7 2 Retired $68.8 3 Securities / Investment $57.8 4 Real Estate $49.9

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5 Insurance $30.4 6 Health Professionals $28.3 7 TV / Movies / Music $24.9 8 Computers / Internet $23.9 9 Oil & Gas $22.8 10 Business Services $20.8 These are the top ten industries by total amounts given. The largest corporate givers tend to be in highly regulated industries. * Center for Responsive Politics Other highly regulated industries that tend to give include the tobacco, energy, pharmaceutical, defense, entertainment, communications, and transportation industries. Why Give? Corporations tend to give for several reasons but the biggest reason is quite clear: a desire to influence matters that are important to the firm or to the firms managers (12). For example, when deregulation took place in certain sub sectors of the energy industry, firms believing deregulation to be in their best interest significantly increased the amounts donated to politicians. Additionally, they also increased their lobbying spending to provide additional pressure on politicians to do the things that they proposed (13). Political influence can take several forms. Two of the most common ways are through policy formation, including favorable writing of laws, and agenda setting (14). When writing policy there are several things that must be considered including the overall goal of the law, the effect the law will have on both direct and indirect parties, and the winners and losers created as a result of the policies. When laws are written, corporations want to be on the winning side and they can accomplish this by influencing the language and details within legislation. This is accomplished mainly through the relationships that are established by, and reinforced through, campaign contributions (15). When sizeable donations are made, many candidates/politicians are known to take one-on-one meetings with large donors to listen to their concerns (16) . During this time, one can expect corporate representatives (e.g. CEOs, lobbyist, etc.) to voice their concerns and preferences on specific items of interest. In fact many have been known to even offer suggestions or guidelines for how the laws should be written or applied (17). The theory of investing in the political process leads one to believe that if politicians do an acceptable job in forming policies and/or legislation favorable to firms, then the politicians can expect future support. If they are unsuccessful, support may be diminished or passed on to an opponent in a future election. Agenda setting is another important way in which corporations wish to have influence. Agenda setting is the ability to have issues important to the firms become a focus of public debate. For example, some argue that the current Bush Administrations emphasis on an Energy bill and the President making it one of his priorities, is simply a reflection of his ties and duties to the energy industry (18). Agenda setting is also important because there

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are issues that many corporations would prefer not to be part of the public debate; actions that they would rather accomplish under the radar. By having an impact on topics that are and are not discussed in public, firms are better able to address their needs. If they believe public sentiment is on their side, they try to get things out in public debate. If public sentiment is against them, they try to have things done quietly. Some studies suggest that political donations dont change politicians, but are simply a reflection of a politicians already stated interests (19). For example, if a politicians stance on trade was protectionism (e.g. high tariffs, quotas, and other non-tariff barriers), and if a firm saw this viewpoint as being in their best interest, they typically would support the candidate. Regardless of the type of influence exerted, firms give because they wish to have some control over situations that could be either beneficial or detrimental to the firms success. They have influence because even though politicians are supposed to represent the interests of the their constituents, they are much more likely to listen to the concerns of their large donors, the ones who help them attain and maintain their position. What Determines The Amount Given? There is no one particular formula that determines how much money corporations will donate to politicians, however, several general guidelines can be established. The first thing that should be considered is the size of the firm. This is important because company PAC funds are raised from employees of the firm. As a result, larger firms typically have more funds to donate through their PAC. Additionally, larger firms tend to have more people who can make larger personal donations. For example, a firm with 100,000 people typically will have a larger number of employees who can max out personal donations to candidates than a firm with 100 employees. When coupled with the greater availability of PAC funds, larger firms generally contribute more. Another important consideration is the firms industry. As previously stated, highly regulated industries tend to have higher levels of political donations. Firms in these industries tend to give more because, by obtaining influence, they hope to consistently improve the regulatory environment in which they operate. Additionally, the impact on these firms tends to be much more noticeable than in other areas, such as consumer goods. Perceptions of what is at stake also tend to drive the amounts given. Generally speaking, if a firm believes more is at stake, they typically will donate more funds. For example, if a firm is in the pharmaceutical industry and believes substantial changes in patent law will take place in the next legislative session, it is more likely to donate to the candidate who will support a position most favorable to the firm. The length of a relationship is also important when determining how much to give. It can be expected that the longer there has been an established relationship, the greater the likelihood of a larger sum being donated. Another important factor is the importance of the politician. Politicians in leadership positions, like the

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President, Majority Leader, or Chairman, tend to receive more and larger donations. Additionally, politicians who have more power over the issue areas of importance to the firm tend to receive larger amounts and more donations in general: chairmen of relevant committees tend to receive more campaign contributions than non-chairmen. If a firm is donating to these politicians, they would tend to give larger amounts and the donations would tend to be more frequent. There are several other factors that affect the amount given. These include the party of the politician (20), the politicians constituency (21), prior personal relations (22), and legal limits to donations (23). Costs vs. Benefits Firms are banned from directly contributing to political campaigns. Instead, they usually exert their influence through Company PACs, as well as individual donations. Company PACs must submit statements to the Federal Election Committee noting every donation they make. When this amount is added to individual contributions and lobbying costs, an estimate is derived for the cost to companies for political involvement. However, it must be made very clear that other than lobbying, there are no direct costs to the firm: individuals contribute their own money to candidates and the PAC and, therefore, it is not a direct company expense. Secondly, even if PAC donations were a direct expense of the firm, they would be nominal when compared to other expenses. For example, in the 2002 election cycle, the Altria Group donated over $4 million from its PAC, management, and employees (24). While this might seem large in absolute terms, for a company that at the time had over $80 billion in revenues, and $11 billion in profit (25), this represents a paltry sum. When these costs are compared to the potential benefits, it is clear that political donations can provide for substantial returns and, therefore, it is probably in the best interest of firms to make political donations. By making donations, firms at the very least have an open ear and sometimes one-on-one time to make their case. If they dont make donations they lose this ability to have a direct line and, in a sense, leave completely to chance changes in policy that could significantly affect the firm. Personal Interests vs. Corporate Interests Most companies have given overwhelmingly to Republicans (see Table 2). This is because the GOP is generally viewed as the pro-business party. Even though this is the case, the question arises as to whether or not political donations are a reflection of the personal preferences of managers and, if so, are they in the best interest of shareholders. This question arises because the firms management determines the recipients of PAC donations, as well as how much will be donated. Table 2 Donors, Symbols, Total Amount Given, Percent to Democrats and Republicans Organization Name icker Total DEM REP

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Altria Group MO $20,935,067 37 62 FedEx FDX $20,874,988 34 65 Goldman Sachs GS $20,015,792 56 42 AT & T T $19,672,908 47 52 United Parcel Service UPS $17,645,995 29 70 Citigroup Inc C $17,605,641 52 47 Time Warner TWX $14,120,917 75 24 SBC Communications SBC $13,625,895 33 66 Microsoft Corp MSFT $13,319,470 59 39 Verizon Communications VZ $12,978,611 39 59 JP Morgan Chase & Co JPM $12,852,861 51 48 BellSouth Corp BLS $12,849,142 42 57 Lockheed Martin LMT $11,981,114 39 60 Morgan Stanley MWD $11,734,562 39 60 Bank of America BAC $10,937,570 46 53 General Electric GE $10,909,580 43 56 Union Pacific Corp UNP $10,626,845 20 78 Merrill Lynch MER $10,396,350 27 71 AFLAC Inc AFL $10,225,820 37 62 MBNA Corp KRB $9,963,331 26 72 Boeing Co BA $9,111,478 45 54 Pfizer Inc PFE $9,075,591 34 65 Chevron Texaco CVX $8,794,424 17 82 Freddie Mac FRE $8,537,619 73 26 UST Inc UST $8,504,152 18 81 Walt Disney Co DIS $8,389,245 69 30 General Motors GM $8,345,759 36 63 Anheuser-Busch BUD $8,170.034 44 55 Exxon Mobil XOM $7,828,733 11 87 Archer Daniels Midland ADM $7,711,339 39 60 American International Group AIG $7,688,152 54 45 General Dynamics GD $7,675,091 42 57 Southern Co SO $7,389,392 20 79 Metropolitan Life MET $6,897,253 52 47 CSX Corp CSX $6,891,830 26 72 Eli Lilly & Co LLY $6,721,141 29 70 Bristol-Myers Squibb BMY $6,458,777 27 71

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This table shows the top 37 companies by total amount given. As seen here, most firms have given the majority of their funds to Republicans however ina ll cases a portion is still given to Democrats. HMM note in their paper that there are three groups that potentially benefit from political donations: politicians, managers, and shareholders. Much study has been done on the effects of donations for politicians (26). There is only a small literature that explores the impact of political donations on managers and shareholders. One study by Gupta and Swenson, which studied the effects of a major tax law change in 1984, found that a firms PAC contributions, and individual managers campaign contributions, were both positively correlated with the tax benefits at stake for the firm (27). In other words, PAC and personal donations by management seem to support the assertion that managers actions are aligned with shareholder interests. There are still critics who point to examples of managers supporting a candidate for social issues that are irrelevant to the overall success of the firm. However such occurrences seem to be the exception not the norm, and on the aggregate it seems firms typically do make donations to address their interests or to support those whom have a vested interest in the industry (e.g. former executives). In fact, when Republicans took control of the house in 1994, and later on the Senate, donations shifted heavily to the GOP (28). This supports the assertion that large corporations are pragmatic donors and give when and where necessary (29).DATA AND VARIABLE DEFINITIONSData In a perfect world, it would be ideal to obtain a corporate PACs list of donations, managements donations, their political affiliations, and all employee donations, and then analyze this data in relation to polling data of the relative strength of the two major political parties. In reality, this is not practical because such information is not easily found. For example, all donors to campaigns must list their job title and corporate affiliations, however, they rarely do so, usually only listing their general occupation (30). Additionally, polling information is not typically released on a daily basis and normally only tracks one candidate against another, not the relative strength of one party over the other. To address these shortcomings, we have used several proxies in an attempt to answer whether corporate campaign contributions enhance shareholder wealth. Donations to political parties are often difficult to track, however, they can normally be found via tracking through the Federal Election Commission (FEC). The data provided from the FEC is very difficult to decipher, but several interest groups have simplified the data into much more user-friendly versions. Perhaps the most well know is the Center for Responsive Politics (CRP). The CRP maintains extensive databases on political donations, including profiles and background information on donors, the recipients of funds, the type of funds donated (e.g. PAC funds, soft-money, hard-money, bundled funds, etc.), and aggregate totals. The CRP also maintains a listing of the top 100 donors since its inception in 1989. Thirty-seven of the top 100 donors are members of the S&P 500. These firms will make up our sample group: Table 2 lists the 37 firms, their ticker symbol, the total amount donated, and the percentage given to each party.

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The S&P 500 is a market-capitalization (number of shares outstanding times the share price) -weighted index that tracks the performance of the 500 largest US firms. This index provides a broad overview of US market conditions because it encompasses several broad sectors. Since our sample contains firms from many different sectors (e.g. agriculture, consumer products, energy, financial services, etc.) the S&P will provide a good proxy for the market. Returns for the S&P 500 were retrieved using the Center For Research In Security Prices (CRSP). Stock data including, raw return, beta-excess return and holding period return for the 37 companies was retrieved using the same service. Since it is extremely difficult to find daily polling data from the major pollsters (e.g. Zogby, Gallup, CNN, etc.) the Iowa Electronic Markets (IEM) have been used instead. The IEM are a small-scale, real-money futures markets where contract payoffs depend [on] political events such as elections. (31) Using the IEM, participants can trade "shares" of political candidates or parties with the final return dependent upon the outcome of the election. Markets include a winner-takes-all and vote-share market. The main difference between these two markets is the winner takes all market tries to predict the ultimate winner in an election while a vote share market predicts the percentage of votes each candidate will receive. The IEM is extremely effective at predicting outcomes, especially in the case of the vote share market in which there is an average error of only 1.3% (32). Historical daily closing prices from the 2000 presidential, winner-takes-all market will be used for the analysis. This provides 137 observations per contract. These contracts reflect the IEM market sentiment as to which candidate will win the Presidential election. The Presidential election was used because this branch of government has the most influence in agenda setting and policy formation, arguably two of the most important areas for corporations. Variable Definitions R = ( Pt Pt-1 )/ Pt-1For this analysis, we define the following variables: return, R, is calculated as todays price (Pt) minus the prior days price (Pt-1), divided by the prior days price (Pt-1). This is the calculated return for all companies, the S&P 500, and the IEM data. The returns for all firms and the S&P 500 do not assume the reinvestment of dividends. METHODOLOGY AND RESULTSAccording to the CRP, the top 100 donors have given over $1 billion in federal election campaigns from 1989 to October 2004. The 37 companies we track have given over $417 million. The top 100 donors give slightly more money to Democrats than to Republicans due to the presence of several large unions. Although Democrats

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hold a slight lead in funds from the top 100 donors, this began to change when Republicans won control of the house in 1994 and later on gained control of the Senate (33). Large corporations, such as the ones tracked in our sample, have shown a sort of pragmatism in their giving and have shifted much of their donations to Republicans (34). The trend has also seen large increases in the absolute amount corporations donate. As a result (see Table 2), 28 of the 37 companies in the sample have given over half of their donations to Republicans. Many factors affect the price of a stock. In order to determine the effects of political affiliation with respect to returns, we calculate return to be: R = + 1(S&P500) + 2(IEM) + Where = intercept of the returns, 1 = beta of the stock to the S&P 500 index, 2 = beta of the stock in relation to the Iowa Electronic Market data, and = error adjustment. By determining b2, we are able to see the effects of the firms affiliation to either political party. In determining the effects on company stock we have accounted for the effects of the market in order to isolate the effects from outside factors. One would expect companies who donate a majority of funds to Republicans to have a positive 2 when regressed against Republican IEM contracts. This would lead to better returns when there are increases in contract prices for Republicans and decreases in contract prices for Democrats. However, since this formula is related to the capital asset pricing model (CAPM), it suffers from some of the same limitations as the original formula. The sample for this experiment consists of the 37 publicly traded companies that are named in the CRP 100 top all-time donors list. After finding the daily company returns for the same 137 periods covered by the Iowa election markets, they were regressed using the formula above. Tables 3 and 4 show 2 when this process is undertaken for each contract. The data is not consistent with the hypothesis that a firm should have a positive 2 when regressed against the contract for the party which it donates more money to (35). Table 3 Democrat Percentage, Iowa Electronic Market Beta, and T-Stat Organization Name Ticker REP 2 T STAT Time Warner TWX 75% 0.022 0.801 Freddie Mac FRE 73% -0.014 -0.379 Walt Disney Co DIS 69% -0.019 -0.554 Microsoft Corp MSFT 59% -0.004 -0.192 Goldman Sachs GS 56% -0.018 -0.806 American International Group AIG 54% 0.008 0.205 Citigroup Inc C 52% 0.013 0.471 Metropolitan Life MET 52% -0.003 -0.110 JP Morgan Chase & Co JPM 51% -0.006 -0.308 AT & T T 47% 0.033 1.153

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Bank of America BAC 46% 0.018 0.796 Boeing Co BA 45% 0.019 0.404 Anheuser-Busch BUD 44% -0.014 -0.455 General Electric GE 43% 0.018 0.747 BellSouth Group BLS 42% 0.018 0.682 General Dynamics GD 42% 0.008 0.223 Verizon Communications VZ 39% -0.019 -0.562 Lockheed Martin LMT 39% -0.025 -0.690 Morgan Stanley MWD 39% -0.005 -0.174 Archer Daniels Midland ADM 39% -0.008 -0.343 Altria Group MO 37% -0.009 -0.311 AFLAC Inc AFL 37% 0.008 0.265 General Motors GM 36% 0.020 0.573 FedEx Corp FDX 34% -0.002 -0.063 Pfizer Inc PFE 34% 0.045 1.411 SBC Communications SBC 33% 0.048 1.612 United Parcel Service UPS 29% 0.009 0.289 Eli Lilly & Co LLY 29% 0.060 1.695 Merrill Lynch MER 27% 0.024 0.664 Bristol-Myers Squibb BMY 27% -0.011 -0.492 MBNA Corp KRB 26% -0.004 -0.127 CSX Corp CSX 26% 0.026 0.816 Union Pacific Corp UNP 20% 0.041 1.292 Southern Co SO 20% -0.006 -0.230 UST Inc UST 18% 0.003 0.065 ChevronTexaco CVX 17% 0.009 0.269 Exxon Mobil XOM 11% 0.031 1.007 This table shows the beta that corresponds to the IEM data and the corresponding t-stat. There are no statistically significant outcomes. Additionally there appears to be no trend in the Beta. Table 4 Republican Percentage, Iowa Electronic Market Beta, and T-Stat Organization Name Ticker REP 2 T STAT Time Warner TWX 24% -0.003 -0.014 Freddie Mac FRE 26% -0.042 -0.994 Walt Disney Co DIS 30% -0.037 -0.893

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Microsoft Corp MSFT 39% 0.011 0.340 Goldman Sachs GS 42% -0.012 -0.389 American International Group AIG 45% -0.047 -1.063 Citigroup Inc C 47% -0.050 -1.151 Metropolitan Life MET 47% -0.042 -1.127 JP Morgan Chase & Co JPM 48% 0.027 0.932 AT & T T 52% 0.038 0.893 Bank of America BAC 53% -0.013 -0.346 Boeing Co BA 54% 0.009 0.218 Anheuser-Busch BUD 55% -0.004 -0.091 General Electric GE 56% 0.030 0.631 BellSouth Group BLS 57% 0.010 0.265 General Dynamics GD 57% 0.027 0.478 Verizon Communications VZ 59% -0.012 -0.359 Lockheed Martin LMT 60% 0.005 0.133 Morgan Stanley MWD 60% 0.019 0.459 Archer Daniels Midland ADM 60% 0.006 0.162 Altria Group MO 62% 0.039 1.028 AFLAC Inc AFL 62% -0.005 -0.186 General Motors GM 63% -0.053 -1.850 FedEx Corp FDX 65% 0.048 1.328 Pfizer Inc PFE 65% 0.011 0.353 SBC Communications SBC 66% -0.031 -1.019 United Parcel Service UPS 70% -0.009 -0.369 Eli Lilly & Co LLY 70% -0.015 -0.364 Merrill Lynch MER 71% -0.001 -0.035 Bristol-Myers Squibb BMY 71% 0.030 0.887 MBNA Corp KRB 72% -0.070 -2.003 CSX Corp CSX 72% -0.040 -1.253 Union Pacific Corp UNP 78% -0.018 -0.508 Southern Co SO 79% -0.013 -0.351 UST Inc UST 81% -0.009 -0.326 ChevronTexaco CVX 82% -0.020 -0.601 Exxon Mobil XOM 87% -0.031 -0.940 This table shows the beta that corresponds to the IEM data and the corresponding t-stat. There are no statistically significant outcomes. Additionally there appears to be no trend in the Beta. Following these regressions, portfolios were formed dependent upon companies percentages donated to the political parties. Four portfolios were formed: Strong Democrats (SD), Strong Republicans (SR), Weak

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Democrats (WD) and Weak Republicans (WR). Strong portfolios are companies that have given over 60% of their overall donations to either Democrats or Republicans, while Weak portfolio members give 50-60% of their donations to a party. Assuming all stocks were weighted equally, a portfolio return was derived and then regressed against the S&P 500, and IEM contract prices for both parties. Table 5 summarizes the 2 for these portfolios. This analysis produced only one statistically significant and interesting result: Weak Republicans react negatively to improvements of Republicans in the IEM. If this were the case, why then would managers continue to support the party in question? One hypothesis is that corporate donations reflect the political preferences of management. Table 5 Portfolio IEM Contract Betas and T Stats Portfolio DEM REP 2 T STAT 2 T STAT Strong Democrats 0.020 0.368 -0.033 -0.499 Weak Democrats -0.005 -0.053 0.012 0.112 Weak Republicans 0.263 2.199 -0.276 -1.929 Strong Republicans 0.088 0.489 0.015 0.072 This table shows the betas and t stats for equal weight portfolios created from the top 37 corporate donors. The only statistically significant result is from the Weak Republicans portfolio. This portfolio appears to have a positive relationship with the Democratic IEM contract and a slightly negative relationship with the Republican IEM contract. The third analysis involves correlating portfolio returns to IEM contact returns. This would determine the direction and strength of relationship, if any, between the returns of the members of the portfolio and the returns on the IEM contract. One would expect there to be a strong positive correlation between the returns for firms strongly supporting one party and the returns on the IEM contract (36). This however is not the case. Table 6 summarizes the correlation data and shows that all portfolios have a negative correlation to the Republican winner-takes-all contract in the IEM. This too would support the hypothesis that donations from corporations reflect the political preferences of managers and are not necessarily investments for the firm. Table 6 Correlations Portfolio DEM REP Strong Democrats 0.014 -0.044 Weak Democrats -0.017 -0.003 Strong Republicans 0.028 -0.013 Weak Republicans 0.124 -0.132 This table shows the correlation coefficients between the portfolios and the IEM contracts. All portfolios are negatively correlated withANALYSIS OF RESULTS AND IMPLICATIONS

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The results of this study seem to suggest that shareholders receive no additional monetary benefits from a firms support of one political party or the other. This is of great significance because if shareholders receive no additional benefit, then companies should refrain from making political donations. There are several possible reasons why there appears to be no additional financial benefit that shareholders gain from political support. The most likely reason is that it is difficult to estimate the economic benefits that firms will receive from their support of political parties. As a result, investors and traders find it difficult to discount these benefits and, therefore, political outcomes have no material impact on the price per share. Of particular interest is the correlation data. This data reveals that all firms have a slight negative correlation to Republican contracts. In other words this data suggests that when markets believe republicans will win the election, all security prices, regardless of which party the company supports, goes down. This is interesting because the majority of corporate campaign contributions go to Republicans. Given this, one would expect there to be at least a slight positive correlation between the Republican IEM contracts and the SR and WR portfolios, but this clearly is not the case. In other words, even though there is a converse relationship with returns to shareholders and the general belief that Republicans will win the election, managers continue to invest in Republicans to the detriment of shareholders. This study would support the hypothesis that political donations are a reflection of the personal preferences of management, and are not necessarily in the best interest of shareholders. Another implication of this study is that the market might not properly adjust for political risk. In other words, the markets might not be efficient when it comes to addressing the impact political environments can have on businesses. CONCLUSIONIn this study we investigated the question whether corporate campaign contributions enhance shareholder wealth, under the assumption provided by HMM that these donations are like investments and that managers expect a positive payoff in the future. In order to accomplish this, we performed multiple regressions and correlation studies of the top 37 corporate donors over the past 15 years with data from CRSP and from the Iowa Elections Market, a futures market that allows traders to buy shares in political outcomes. While the conclusion is not completely clear, the evidence seems to indicate that corporate campaign contributions are not necessarily considered investments for the firm by the market. The statistically insignificant outcomes, general trends, and correlation studies all seem to say the same thing: corporate campaign contributions do not serve to enhance the shareholder wealth and could potentially reflect the personal preferences of the management of the firm.

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With this knowledge, the analyses performed in this study are of high importance to investors as they should be interested in whether these donations are actually useful investments for the firm. Further analysis could be performed using industry specific indexes. Additionally, the study could be expanded to include all members of the S&P 500 to determine whether the statement holds true for all publicly traded firms who make political donations. REFERENCES1. Hertzel, M; Martin, J and Meschke J. (2002). Corporate Soft Money Donations and Firm Performance. Arizona State University (Google Scholar) 1-24 Back 2. These are funds donated directly to candidates from individuals. This contribution limit was raised to $2000 in 2002. Back 3. Bundled funds are donations where fundraisers will gather the donations of multiple donors and send them in to candidates and parties at one time. Bundled funds are known to be as high as $100,000 or more (CRP). Back 4. Center For Responsive Politics, Top All Time Donor Profiles, http://www.opensecrets.org/orgs/list.asp?order=A Back 5. Weisskopf, Michael. Enrons Democrat Pals Time; 8/26/2002, Vol. 160 Issue 9, p20, 1/2p, 1c Back 6. Center For Responsive Politics, http://www.opensecrets.org/bigpicture/index.asp Back 7. Dionne Jr., E. J., MONEY & ELECTIONS, Commonweal, 4/9/2004, Vol. 131 Issue 7, p8, 1p Back 8. Hertzel, M; Martin, J and Meschke J. (2002). Back 9. Center For Responsive Politics, Political Action Committees, http://www.opensecrets.org/pacs/index.asp Back 10. For example, some industry groups such as the American Bankers Association (ABA) count as members financial services firms. The ABA receives its funding from these institutions and makes donations as a industry representative. When such groups are considered, the number of donating firms probably increases considerably. Back 11. Center For Responsive Politics, Top Industries Through The Years, http://www.opensecrets.org/pubs/ whospay00/industrychange.asp Back 12. Hertzel, M; Martin, J and Meschke J. (2002). Back 13. Weisskopf, Michael. Enrons Democrat Pals Time; 8/26/2002, Vol. 160 Issue 9, p20, 1/2p, 1c Back 14. Hertzel, M; Martin, J and Meschke J. (2002). Back 15. Center For Responsive Politics, Cashing In: A Guide to Money, Votes, and Public Policy in the 104thCongress, http://www.opensecrets.org/pubs/cashingin_104th/04intro.html Back 16. Not ducking , Economist, 00130613, 3/27/2004, Vol. 370, Issue 8368 Back 17. Ibid. Back

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18. Ibid. Back 19. Magee, C. (2000). Do Political Action Committees Give Money To Candidates For Electoral or Influence Motives? Public Choice 11:372-399 Back 20. Republicans are generally viewed as more business friendly and as a result generally receives more and larger donations from corporations. Back 21. The state that the politician represents can have a huge impact on the sources and levels of political donations. For example, politicians from Texas generally have backing from energy and energy services firms native to the state. Back 22. A great example of this comes from former Goldman Sachs Chairman and current New Jersey Senator, John Corzine. When running for the US Senate, the firm raised millions of dollars internally to support his candidacy and continues to support his campaigns financially. Generally speaking, if politicians have corporate ties (e.g. a former executive of a firm, one could expect a larger amount of donations. Back 23. Multi-candidate PACs can give $5000 to individual candidates, $15,000 to national parties, and $5000 to any other PACS or state parties (Center For Responsive Politics. Federal Campaign Finance Law: Contribution Limits http://www.opensecrets.org/basics/law/index.asp Back 24. Center For Responsive Politics, Altria Group Donor Profile http://www.opensecrets.org/orgs/summary. asp?ID=D000000067&Name=Altria+Group Back 25. Annual Report. Income Statement, http://finance.yahoo.com/q/is?s=MO&annual Back 26. Hertzel, M; Martin, J and Meschke J. (2002). Back 27. Ibid. Back 28. The Center For Responsive Politics www.opensecrets.org Back 29. Ibid. Back 30. Hertzel, M; Martin, J and Meschke J. (2002). Back 31. What Is the IEM? http://www.biz.uiowa.edu/iem/media/summary.html Back 32. Ibid. Back 33. The Center For Responsive Politics, www.opensecrets.org Back 34. Ibid. Back 35. If Company A donates 65% to Republicans, when regressed against the Republican contract in the IEM, one would expect it to have a positive 2. Back 36. For example, one would expect returns on the Strong Democrats portfolio to have a strong positive correlation with the returns on the IEM winner-takes-all Democrat contract. Back

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