Americans are deeply cynical about both corporations and politicians. For the past several decades, Gallup has conducted regular polls of public confidence in various social and political institutions, with big business and Congress consistently ranking at the bottom of the list (see, e.g., Gallup 2013). Not surprisingly then, corporate political spending and lobbying are viewed with suspicion, further fueled by exaggerated rhetoric from reform-minded pundits, advocacy groups, and demagogues. Indeed, it's hard to imagine an easier means to curry favor with the mass public than to decry the influence of big business in politics! And although there is no shortage of academics who ride this bandwagon, many scholars of American politics understand both the role of money in politics and the influence of corporations to be much more limited than imagined by the conventional wisdom.
In previous work, I have explored the contrast between popular perceptions of the role of money in politics and the lessons of political economics (Milyo 1999; Milyo, Primo, and Groseclose 2000). In this essay, I review more recent empirical research on how financial markets respond to political events with the goal of better understanding the nature and extent of corporate influence in American politics. Of course, concern about corruption in politics is not limited to the influence of corporate political spending and lobbying. Unions, wealthy individuals, and even the major political parties loom large as potential agents of corruption. But movements in financial markets provide a unique lens on the value of corporate activities--hence, the focus here on corporate political influence. However, before launching into a discussion of political event studies in financial markets, I provide some background.
Corruption and Corporate Political Activity
It is no secret that the American public is worried about the existence and extent of political corruption. For example, in a nationally representative opinion survey of one thousand persons taken in the fall of 2008, a little more than 50 percent of respondents agreed that corruption in the federal government is "widespread" and an "extremely serious concern," while fewer than 5 percent considered corruption in the federal government to be "rare" or "not a concern" (Konisky, Milyo, and Richardson 2008). However, Americans are not sanguine about quick fixes for the problem of political corruption. The same survey reveals that only 7 percent of respondents strongly agree that there exists some package of reforms that would greatly reduce their concern about corruption in government. Obviously, for many Americans, politics is an inherently corrupt activity.
The timing of this survey, in the immediate aftermath of a financial panic, probably served to inflate popular concern about corruption, but evidence from other surveys indicates that there is a good deal of persistence in these views, especially with regard to members of Congress (e.g., Jones 2011 and Carroll 2006). Moreover, subsequent events likely have not had much of a salutary effect on public opinion. The past several years have witnessed government-rushed bailouts of private industry, unprecedented increases in stimulus spending, large loan guarantees to private firms, and unsavory machinations undertaken to round up votes in Congress to pass healthcare reform. The most recent election cycle has also seen the rise of so-called super PACs (political action committees) and total campaign spending that far eclipses previous records.
But what exactly is political corruption? Surely, illicit activities such as bribery and influence peddling are corrupt. These quid pro quo arrangements are what the courts are most concerned about when deciding whether there is a compelling government interest to justify regulations on political activities (for example, contribution limits, mandatory disclosure requirements, and so forth). But public opinion on "political corruption" likely extends beyond this legal concept and instead reflects popular concern with practices that may be legal but are nonetheless discomfiting (e.g., Lessig 2013), such as favoritism in the awarding of government contracts and hiring and the passage of regulations and legislation to benefit certain groups or individuals. In some instances, favoritism toward friends, family, and political associates may cross the line into illicit activity, but such cronyism is often "politics as usual."
In common parlance, "corruption" also takes on meanings outside of quid pro quo relationships or cronyism. For example, legal activities, especially campaign contributions and lobbying, are often characterized as corrupt or corrupting. Beyond this, partisanship and ideology also play an important role in whether people perceive politics to be corrupt; events and actions are always more suspicious when they involve members of an opposing faction (Milyo 2012). As a consequence, in reviewing and analyzing the social scientific evidence on political corruption, it is important to distinguish between quid pro quo corruption and cronyism as well as between actual corruption and legal activities (for example, campaign contributions) that may facilitate corruption.
For many political observers, the source of political corruption is obvious: privately financed political campaigns facilitate a market for political favors (Grossman and Helpman 1994). Advocates for campaign-finance reform have long asserted that campaign contributions are bribes and that only full public financing of political campaigns can address the problem of political corruption. However, it also has long been recognized that although there is some superficial evidence consistent with the view that campaign contributions are the functional equivalent of bribes, upon closer inspection that hypothesis is not well supported by the scholarly literature (e.g., Sorauf 1992).
The best illustration of this assumed equivalence between contributions and bribes is found in analysis of corporate PAC campaign contributions and roll-call votes on issues of interest to those same corporations. Firms in industries that are more highly regulated or dependent on government contracts are more likely to form PACs (Grier, Munger, and Roberts 1994). Those PACs make contributions to party leaders and members that sit on committees with relevant policy jurisdictions (Grier, Munger, and Roberts 1991). More to the point, PAC contributions are also highly correlated with the likelihood that a firm will benefit from government investment and with roll-call votes on legislation favored by the sponsors of corporate PACs (Duchin and Sosyura 2012). Even the timing of contributions--coincident with major steps in the legislative process--suggests a market for favors (Stratmann 1998). All of this is consistent with the notion that campaign contributions are like bribes, or, as Fred McChesney (1987) argues, extortionary payoffs. But this evidence is also consistent with the phenomenon that PACs support politicians that hold beliefs most beneficial to the employees and investors in the associated firms (Bronars and Lott 1998; Levitt 1998).
In fact, both theory and evidence favor the latter interpretation, at least in the pre-super PAC era. First, bribery, influence peddling, and extortion are crimes, so it is not possible to make legally enforceable promises regarding exchanges of money for favors, which at least hinders such exchanges. Further, contributions made directly to federal candidates are limited by law, so the amounts of money being contributed from any one source may not justify the opportunity cost of illicit behavior. Moreover, contributions to candidates must be disclosed; the activities of politicians are closely monitored by competing candidates and watchdog groups eager to make accusations of impropriety. And several studies show that marginal campaign expenditures have negligible effects on federal election contests (Levitt 1994; Gerber 1998; Milyo 2001), which implies that political contributions to high-spending incumbents are particularly inefficient in-kind gifts and unlikely to win much gratitude. These facts do not preclude illegal transactions, but they do suggest a limited scope for such activities.
Empirical evidence also raises doubts about the efficacy of corporate PAC contributions as the functional equivalent of bribes (Milyo, Primo, and Groseclose 2000). The amounts of money transferred to politicians in the form of PAC contributions are not only well below the legal maximum but in the aggregate are also dwarfed by corporate lobbying expenditures, which at least suggests that contributions are less effective at influencing policy than lobbying. In turn, corporations devote far more resources to charity than all to political activities combined, which again suggests that both contributions and lobbying have limited impact. Given all this, it is not surprising that most careful research studies find no causal impact of campaign contributions on legislators' roll-call votes (Ansolabehere, de Figueiredo, and Snyder 2003).
This evidence has led many political scientists to suggest that contributions may simply buy access to politicians (Wright 1989). However, there is also little evidence that access and lobbying influence roll-call votes in any systematic manner (Ansolabehere, Snyder, and Tripathi 2002; Milyo 2002). Of course, roll-call votes are a very blunt measure of influence. It is possible that the purpose of campaign contributions and lobbying is to influence legislators to alter their behavior in committee mark-ups of legislation (Hall and Wayman 1990). Once again, though, the evidence for this is scant (Wawro 2000; de Figueiredo and Kelleher Richter 2013). Alternatively, firms and interest groups may employ lobbying and political advertising as legislative subsidy to aid political allies in government via the provision...