New research shows that the annual payoff to a dollar of political influence seeking is at least 20x. Only 15% of companies were forced to report whether they created the jobs promised by them to receive state subsides
Today’s Dealbook column in the New York Times highlights increased investor scrutiny of companies’ political donations. Gary Gensler, the new SEC chief has suggested that the SEC should consider corporate political spending disclosures. There are strong evidence-based reasons for why he’s right.
As of now, there is no requirement that companies publicly disclose (i) contributions made to political parties, candidates, committees; (ii) money given to 527 groups (the IRS designation for political action committees (PACs)) to influence the election of political candidates and sway votes from elected officials; (iii) funds paid to trade associations and section 501(c)(4) social welfare organizations that the recipient can use for political purposes; and (iv) payments made to influence ballot measures.
If such data is missing, how does anyone assess the payoffs on political rent seeking? As it turns out, tracing both a company’s investments in political influence seeking and the associated payoffs is really difficult. Focusing on just investments first, my co-authors, John Barrick of Brigham Young University, Adam Olson of the University of Cincinnati and I have scoured the web to assemble a data set of lobbying spending, PAC contributions, lobbying through trade associations, and an invitation to testify in Congress for 10 years spanning 2010-2020.
Lobbyists must report the funds they receive to lobby on behalf of their organization or client to the U.S. Senate or the House of Representatives. Currently, this reported data is combined and made available on the Senate’s website and thankfully compiled into a reasonably digestible form by the Center for Responsive Politics. We then match the names of public companies with those found on Open Secrets. We take this step because PACs must report all the money they receive and give out to the Federal Election Commission (FEC) —raw data that hasn’t been standardized for organization names and/or abbreviations. Hence, we do the best we can in matching the two.
Next, we identify trade associations through the association’s website or via Form 990 and trace the association’s board of directors. We link those directors with their corporate affiliation. Finally, we obtain the names of organizations that provided oral testimony or submitted written statements at congressional hearings from 2015 to 2020 and the names and affiliations of 600 witnesses and those that submitted written statements at 101 Congressional hearings.
Of the 2,758 unique companies in our sample, we find that one dollar of a company’s political investment — over the years 2010-2017 – can be associated with $20.67 of higher annual future earnings. These returns are much larger than payoffs from most alternative investment opportunities that companies generate including investments in advertising or research and development. By this point, why even bother with R&D and advertising? All we need to do is lobby!
Let’s probe the payoffs a bit more. In our study, payoffs are simply measured as the company’s future earnings. Of course, more granularity in terms of payoffs would be nice to get, but that data can be elusive. In the paper, we also explicitly linked political influence seeking to payoffs received by companies under various stimulus bills passed in response to COVID-19.
Can we get more specific data on payoffs? In other ongoing work with Aneesh Raghunandan at the London School of Economics, we traced 1,715 instances of aid, subsidies and grants given by various states to publicly traded companies in the U.S. Of these, only 15% of the grants have explicit reporting requirements on both the number of jobs that the companies initially promised to create and the number of jobs they actually created as a result of the subsidy. Remarkably, only half of the companies tasked with creating jobs actually managed to fulfil their promise to the state. Even this estimate is optimistic – and probably lower for the subsidies that we can’t observe job target data for at the moment.
Why do we need mandatory disclosure of political influence seeking and payoffs? Because the data we can get a hold of is admittedly imperfect and incomplete. A devil’s advocate could argue that we find as much as a 20x payoff because we have not completely identified all of the political spending undertaken by companies. I might also argue that we have potentially missed the intangible payoffs obtained by the companies such as delaying the entry of competition into the firm’s sector. Such a delay would show up as continued earnings stream as opposed to a big fall in earnings had competitors entered the market.
A more compelling reason to mandate these disclosures: as we enter the age of bigger government and more state-directed spending on infrastructure, the payoffs to political spending are only likely to increase in the long run.
Ironically, investment in political influence seeking is hugely positive for shareholder value. Strictly speaking, shareholders and managers would legitimately resist disclosure. Regardless of your political orientation, both the Left and the Right would be wise not to promote crony capitalism. Shining light on both investments in political influence seeking and the payoffs from the state can only be good public policy.