Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for October 2024 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for October 2024 (Final)
1st ETF 2nd ETF 3rd ETF

The Political Campaign Contribution Effect

| | Posted in: Political Indicators

Do companies that “grease the wheels” of our political system via campaign contributions benefit from such participation? In other words, is there a significant positive correlation between company campaign contributions and stock returns? In their October 2006 paper entitled “Corporate Political Contributions and Stock Returns”, Michael Cooper, Huseyin Gulen and Alexei Ovtchinnikov construct a measure of the breadth of company campaign contribution activity and investigate whether this measure relates systematically to returns for shareholders. Combining data from the Federal Election Commission on political action committee (PAC) contributions of publicly traded firms for the period 1979-2004 (over 800,000 contributions by 1,930 firms) with associated stock price and financial data, they conclude that:

  • Companies that make campaign contributions give over any five-year period to an average 73 candidates, 53 of whom win election.
  • The number of candidates a company supports is a significant positive indicator of the company’s future stock returns. A one standard deviation increase in the number of candidates supported indicates a 0.5% increase in monthly returns. This effect is larger than the value premium and the size effect, and is about as large as the momentum effect.
  • On a fundamental level, an increase in the number of candidates a company supports strongly indicates a future increase in the company’s return on equity (ROE). A one standard deviation increase in candidates supported indicates a 1.78% increase in annual ROE.
  • Campaign contributions have greater effect on stock returns for companies that…
    • …support long-term relationships with candidates, home-state candidates and powerful candidates.
    • …contribute to Democratic candidates.
    • …contribute to candidates for the House of Representatives, perhaps because revenue and appropriations bills that might impact company financial results must originate in the House.
    • …are in industries with a relatively small number of firms, heavily concentrated sales and high percentage of unionized employees.

In summary, investors might want lean toward companies that contribute to lots of political candidates (especially Democratic candidates for the House of Representatives).

The authors generally take the point of view that: (1) campaign contributions are investments with extremely high returns; and, (2) in an ideal world, such contributions would not correlate with stock returns. From an alternative reward-for-risk point of view, the authors have perhaps identified a political premium associated with stock returns for companies engaged in work that is particularly sensitive to legislation and regulation (i.e., unusually risky). Without the premium, capital would avoid this risky work.

Login
Daily Email Updates
Filter Research
  • Research Categories (select one or more)