Rajesh Aggarwal, Felix Meschke, and Tracy Wang of the University of Minnesota’s Carlson’s School of Management examine corporate contributions to political candidates for federal offices in the United States from 1991 to 2004. They find that firms that donate have operating characteristics consistent with the existence of a free cash flow problem. Further, donations are negatively correlated with future excess returns. An increase in donations of $10,000 is associated with a reduction in annual excess returns of 9.6 basis points. They find that worse corporate governance is associated with larger donations. However, even after controlling for corporate governance, they find that donations are associated with worse excess returns. Firms that make donations engage in more acquisitions and donating firms’ acquisitions have significantly lower cumulative abnormal announcement returns than firms that do not make donations. When they try to isolate instances in which donations may lead to better returns, they find only limited support for the hypothesis that political donations represent an investment in political capital. Taken together, their results suggest that political donations are more symptomatic of agency problems within the firm.

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