CEO characteristics, firm performance, and corporate political contributions

• Author: Manohar Singh,Vijaya Subrahmanyam,Anita Pennathur
• DOI: http://doi.org/10.1002/rfe.1082
• Date: 01 April 2020
• Published date: 01 April 2020

Rev Financ Econ. 2020;38:379–404. wileyonlinelibrary.com/journal/rfe

|

379

© 2019 University of New Orleans

1

|

INTRODUCTION

In 2010, the Supreme Court in a landmark ruling in Citizens United v. Federal Election Commission legalized independent

corporate political spending. The Super Political Action Committees (Super PACs) play an increasingly pivotal role during

the election cycle, and corporations have to take a stand on whether, and how, to embrace this doctrine which allows them to

make direct contributions to political groups. Corporate political spending has been a key focus of shareholder resolutions in

recent years. Overall, super PACs raised $615million in the 2016 election cycle, compared with $239million at the same time

in 2012.1

Although corporate political activities may yield strategic advantages to politically active firms, they may also be a man-

ifestation of self‐serving behavior of top management, including the CEO. Agency theory suggests that CEO dominance and

interest alignment may determine corporate decisions on political spending. These decisions focus not only on whether to en-

gage in political spending, but also, and more importantly, on how to target such spending. Thus, the research focus of this paper

is twofold: first, to understand if CEO characteristics, specifically those reflecting CEO dominance and interest alignment,

Received: 9 October 2018

|

Revised: 28 August 2019

|

Accepted: 9 September 2019

DOI: 10.1002/rfe.1082

ORIGINAL ARTICLE

CEO characteristics, firm performance, and corporate political

contributions

A firm level pre‐Citizens United analysis

VijayaSubrahmanyam1

|

ManoharSingh2

|

AnitaPennathur3

1Department of Finance,Stetson School

of Business and Economics,Mercer

University, Atlanta, GA, USA

2School of Graduate and Professional

Studies,Southern Connecticut State

University, New Haven, CT, USA

3Department of Finance,College of

Business,Florida Atlantic University, Boca

Raton, FL, USA

Correspondence

Manohar Singh, School of Graduate and

Professional Studies, Southern Connecticut

State University, 501 Crescent Street, New

Haven, CT 06515, USA.

Email: manohar.singh@southernct.edu

Abstract

We investigate if CEO characteristics determine the choice of Political Action

Committee (PAC) contributions by firms and if such participation leads to better

firm performance. Using a unique, hand‐collected database, we also focus on the

identity of the politicians receiving PAC contributions to examine the impact of the

value‐relevance of such contributions. Examining data on corporate contributions

made to candidates seeking federal office during the 2002, 2004, and 2006 elec-

tion cycles, we find that CEO dominance and interest alignment influence strategic

choices of firms with regards to establishing PACs. Our analysis of value‐relevant

contributions shows that firms prefer to donate to politicians representing the state

of a firm's headquarters, validating the truth to the adage that all politics is local.

However, these targeted political contributions do not have a discernible impact on

firm performance.

KEYWORDS

agency theory, CEO characteristics, CEO dominance, corporate political contributions, firm performance

JEL CLASSIFICATION

G3; G34; K2

380

|

SUBRAHMANYAM et Al.

determine the choice of PAC contributions, and second, whether these contributions influence firm performance. Specifically,

our study seeks to explain the rationale for engaging in corporate political activity, and whether participating firms are able to

make value‐relevant choices in the PACs and politicians that they target for such contributions.

Simply defined, a PAC is a political committee organized for raising money to elect and defeat candidates (opens ecrets.

org). PACs can give $5,000 per candidate for an election or $15,000 annually to any political party committee. PACs may also

receive up to $5,000 from any individual, PAC, or party committee per calendar year. The 1974 Federal Election Campaign

Act allowed firms to form PACs as a way to impact legislation by contributing to specific political candidates. Most PACs rep-

resent business, labor, or ideological special interests. Implicit in PAC contributions is that once elected, politicians will make

decisions that are favorable to their contributors. The Federal Election Campaign Act specifies filing and procedural guidelines,

while the Federal Election Commission oversees details related to campaign financing and contributions. As PACs are formed

to influence common objectives, such vehicles tend to be organized by industry category (Dean, Vryza, & Fryxell, 1998).

Financial accounting literature notes that CEO incentive structures affect the behavior and outcomes of firms, (Bebchuk,

Cremers, & Peyer, 2008; Morse, Nanda, & Seru, 2011). Using aggregate data on corporate contributions made to candidates

seeking federal office during the 2002, 2004, and 2006 election cycles, we investigate whether CEO dominance and interest

alignment influence political spending choices in terms of establishing PACs and the level of contributions made. Furthermore,

following a simple, binary variable which examines the factors that precipitate into a decision to form a PAC or not, we con-

struct a more nuanced measure to examine the impact of “good” or “value‐relevant” participation by firms. We compile a

unique firm‐level database which allows us to focus on the identity of specific politicians who are the recipients of PAC con-

tributions, the committees in which they serve, and their home‐location. This enables us to investigate the performance impact

of such contributions.

To clearly delineate the complexity of interaction among the three factors, we first examine the link between political con-

tributions and CEO characteristics. Second, we investigate whether or not political activities—to the extent determined by CEO

characteristics—enhance firm performance. While the first set of tests will shed light on whether potential agency conflict,

proxied by CEO dominance and interest alignment, influences corporate political stances, the second set of tests will verify if

political contributions are actually detrimental to shareholder interests or whether they help align CEO‐shareholder interests.

While the analysis explains the rationales behind firm political participation, a more important and interesting question asks

how firms target their political contributions. From the firm's viewpoint, such targeted spending may be perceived as “good”

when the firm donates to the politicians who can positively influence firm performance. Our unique database allows several

proxies to measure “good” political spending by firms. Our measure focuses on the identity of the politicians who receive

political contributions from the firm. We define a “value‐relevant” or a “good” political contribution as the one where the

contributions are directed to members of the U.S. House of representatives or the Senate who are in a position to influence the

performance of the firm. To this end, we examine the specific committee assignments as well as the location of the politicians

to whom firms donate to see if firms are able to influence policy. It is plausible to argue that by making donations to politicians

from their home state or to those who serve in relevant industry committees, firms stand to gain.

An analysis of CEO dominance indicates that firms with dominant CEOs, proxied by CEO duality, have a greater propensity

to make PAC contributions. While CEO age in absolute terms does not influence corporate political decisions, CEO age relative

to the board impacts such decisions. PAC contributions are more likely in instances when the firm has a relatively older CEO.

We also find support for the agency‐theoretic argument that political participation increases with CEO compensation. With

respect to interest alignment, larger ownership holdings by CEOs lessen the propensity for political engagement. Consistent

with agency theory predictions, our full sample results show that strong CEOs with interests aligned with those of shareholders,

make value‐maximizing decisions for the firm, as proxied by firm stock return and firm ROA. Thus, it appears that, to the extent

CEO characteristics predict PAC contributions; these contributions positively influence firm performance.

We also investigate the subsample of participating firms to investigate whether firms make value‐relevant contributions.

While we document some linkages between CEO dominance and value‐relevant contributions, there is no strong evidence that

dominant CEOs contribute more to politicians who can impact the firm. From an interest alignment perspective, our results

show that CEOs with a higher equity stake in the firm align themselves by making greater contributions to politicians from their

home state. Interestingly, we find that firms with higher institutional ownership donate less to politicians from the home state,

perhaps reflecting a reluctance of large investors to openly court politicians. Overall, our results suggest that strategic political

decisions may not be agency driven and may in fact be value enhancing.

Our paper contributes to the literature on political action committees and CEO power in the following ways. A major contri-

bution of our paper is that we conduct the analysis of the value‐relevance of firm contributions by matching firm location and

industry with the home‐state and committee assignments of the politicians receiving contributions. Our second contribution is

in the area of CEO dominance and agency‐theoretic literature as we examine CEO influence on decision making and strategy.