Investor Reaction to Covert Corporate Political Activity

• Author: Timothy Werner
• Published date: 01 December 2017
• Date: 01 December 2017
• DOI: http://doi.org/10.1002/smj.2682

Strategic Management Journal

Strat. Mgmt. J.,38: 2424–2443 (2017)

Published online EarlyView 7 August 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2682

Received 29 January 2016;Final revisionreceived 7 June 2017

Investor Reaction to Covert Corporate Political

Activity

Timothy Werner*

Department of Business, Government & Society, McCombs School of Business,

University of Texas at Austin, Austin, Texas

Research summary: Citizens United v. Federal Election Commission and subsequent develop-

ments created a covertchannel for rms to allocate resources from corporate treasuriesto political

activity. Through the use of a nancial market event study of an accidental disclosure of rms’

contributions to a Republican nonprot organization, I examine investors’ reactions to covert

investment in independent political expenditures. I nd that, on average, contributing rms expe-

rienced positive abnormal returns around the disclosure event and that these abnormal returns

were more positive for rms in heavily regulated industries as well as those previously making

campaign contributions to candidates. However, rms that recently faced a shareholder resolu-

tion on political spending disclosure experienced negative abnormal returns, suggesting that the

controversial nature of covert activity moderatedinvestors’ reactions.

Managerial summary: The purpose of this study is to examine how investors reacted to an acci-

dental disclosure of rms’ investments in “dark money,” a new form of corporate political activity

allowed by the U.S. Supreme Court in its Citizens United decision. I nd that, on average,investors

reacted positively toward rms identied as making these new political investments, especially if

the rms previously engaged in electoral politics or operatein heavily regulated industries. How-

ever, this reaction turned negative if the rm recently faced a shareholder resolution asking that

it voluntarily disclose all of its political investments. An implication for managers is that they

should consider their rms’ legal and information environments as fully as possible before com-

mitting resources to new and potentially controversial political tactics. Copyright © 2017 John

Wiley & Sons, Ltd.

The debate over the effect of corporate political

activity (CPA)on rm performance has grown sub-

stantially as a result of increasing rm investments

in CPA (Bonica, 2016), and more signicantly, the

prominence of the U.S. Supreme Court’s decision

in Citizens United v. Federal Election Commis-

sion (FEC) in 2010. As Werner (2011), and Strat-

mann and Verret(2015) discussed, Citizens United ,

Keywords: corporate political activity; nonmarket strat-

egy; Citizens United; regulation; disclosure

*Correspondence to: Timothy Werner, Department of Business,

Government & Society,McCombs School of Business, University

of Texas at Austin, 2110 Speedway, Stop B6500, Austin, TX

78712. E-mail: timothy.werner@mccombs.utexas.edu

Copyright © 2017 John Wiley & Sons, Ltd.

and subsequent court and regulatory decisions cre-

ated new channels through which rms may legally

invest additional resources in the electoral pro-

cess both directly and indirectly. These political

investments take the form of unlimited independent

political expenditures (IPE) that corporations, using

general treasury funds, can make directly or can

fund through contributions to IPE-only committees

(so-called “Super PACs”) that disclose their con-

tributors or nonprot entities formed under section

501(c) of the federal tax code that do not have to

disclose their contributors.1The latter option allows

1Unions and individuals also gained greater freedom to make

IPEs as a result of Citizens United and subsequent deregulation.

As a result, the share of campaign spending from noncandidate

sources has grown. For example, according to the Center for

Public Integrity, outside groups were responsible for over 23%

of the advertising expenses in gubernatorial races in 2016 (as of

October 3), an increase from 18% in 2012 when these same ofces

Investor Reaction to Covert Corporate Political Activity 2425

for the covert use of CPA to inuence electoral out-

comes, which in turn, complicates academic and

managerial arguments over the efcacy of corpo-

rate investment in politics as the costs and benets

of covert activity is more difcult to monitor and

evaluate than disclosed forms of CPA, which are

already complex and long-term investment options

(see, e.g., Hadani, 2012; Hadani & Schuler, 2013).

As a result, and despite the Citizens United’s

prominence, investors’ views on rms’ use of IPEs

remain unclear. Several event studies of the Court’s

decision in the case have produced mixed results.

Werner (2011), and Burns and Jindra (2014) found

no effect for the decision based on rms’ prior

political engagements, though the latter study nds

that regulated rms experienced positive abnormal

returns around the decision’s announcement. In

contrast, both Yuan(2015), and Stratmann and Ver-

ret (2015) found positive abnormal returns for rms

based on prior engagement in electoral politics (but

not lobbying) and regulation levels, though these

two studies disagree as to how persistent these

effects are. These differing results appear to be

driven by and sensitive to several research design

choices, including the events modeled, the event

windows estimated, the rms sampled, and the

measures of prior political engagement employed.

One weakness that all four studies share is that they

are all anticipatory studies of investors’ reactions

to the decision’s effect and are not based on the

actual use of IPEs.

In contrast, the event study in this article

examines reactions to an instance of revealed IPE

investment. To do so, I exploit a case of accidental

disclosure, in which the names of contributors to the

Republican Governors’ Public Policy Committee

(RGPPC), a 501(c)(4) nonprot that makes IPEs

under the control of the Republican Governors’

Association (RGA), were published in the New

York Times on September 24, 2014 (Weisman,

2014). The Times reported the names of 91 rms

that contributed to the RGA’s committee, 66 of

which were publicly traded.2To motivate theoret-

ically why investors would react positively to this

were last on the ballot, and in an analysis of 2014 state legislative

and gubernatorial elections, the Brennan Center for Justice found

that 501(c) organizationswere responsiblefor over 70% of outside

spending.

2Despite the limitations of examining any one instance of a

complex strategy such as CPA, especially when such a small

number of publicly traded rms engage in it, exploring this

instance of accidental disclosure to estimate investor reactions to

covert CPA is critical as mandatory disclosure of such activityis

disclosure event, I employ the political markets

framework of Bonardi, Hillman, and Keim (2005),

using it and the broader logic of political exchanges

(see, e.g., Buchanan & Tullock, 1962) to argue

that the forms of CPA allowed by Citizens United

increase the attractiveness of the demand- (i.e.,

rm-) side for CPA as they enhance the resources

rms can employ to gain a competitive advantage

in the nonmarket environment (see, e.g., [Dahan,

2005] for a resource-based view of CPA).

Beyond leveraging this accidental disclosure

empirically to speak to Hadani and Schuler’s call

to explore the effects of “this judicial decision

[Citizens United], as well as its relationship to

rm nancial performance” (2013, p. 178), this

article ultimately offers three contributions to the

nonmarket strategy literature. First, as mentioned in

the prior paragraph, I extend the political markets

approach and integrate it with a resource-based

view of politics by theorizing as to how covert CPA

enhances the attractiveness of the demand side of

political markets. Further, I also identify a bound-

ary condition on this enhancement in the form of

activist shareholders’ antipathy toward covert CPA.

Second, I examine the effect of engagement in CPA

at the state level in the United States, in contrast

to the existing literature that largely focuses on

the national level (Hadani & Schuler, 2013). This

empirical contribution both reveals how the U.S.

states represent attractive political markets from the

supply side and suggests that national-level ndings

regarding how regulation affects CPA and rm

performance apply at the state level. Third, I demon-

strate that investors appear to view covert CPA in

the form of IPEs as a complement to traditional

nancial nonmarket strategies (i.e., the resources

rms were previously allowed to employ in the

electoral arena) (Hillman & Hitt, 1999) as investors

reacted more favorably toward the disclosure of

the use of IPEs if rms were previously engaged

electorally, but not if they employed informational

nonmarket strategies focused on lobbying.

unlikely. Not only has Congress failed to require disclosure, but

in the continuing resolutions funding government agencies that

passed in 2015 and 2016, it also prohibited both the Securities and

Exchange Commission (SEC) and the Internal Revenue Service

(IRS) from using funds to engage in rulemaking on the subject.

Additionally, in an October 2015 joint letter, the heads of the

Business Roundtable, National Association of Manufacturers,

and the U.S. Chamber of Commerce encouraged their members

to resist pressure to disclose voluntarily their political activity

(Levinthal, 2016).

Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2424–2443 (2017)

DOI: 10.1002/smj