Landslide Victories

From the Spring 2011 edition of Vanderbilt Business

Alexei Ovtchinnikov
Alexei Ovtchinnikov

The 2010 U.S. Congressional elections saw an unprecedented boom in campaign spending—$4 billion in all, with about $1.12 billion coming in the form of individual contributions to candidates, according to the Center for Responsive Politics. While political pundits continue to debate what impact this money has on election outcomes, new research from the Owen School points to some clear winners: the individuals who donate and the corporations they support.

Using innovative techniques to match geographic areas that are most affected by government policy with “economically relevant” politicians, the husband-and-wife team of Alexei Ovtchinnikov, Assistant Professor of Finance, and Eva Pantaleoni, Researcher at the Vanderbilt Kennedy Center for Research on Human Development, analyzed nearly 5 million campaign donations between 1991 and 2008.

What they describe in a new research paper is strong evidence that individuals who make political donations—whether at the behest of firms or not—directly benefit companies in their communities.

“The reason we look at individual contributions is because it accounts for about two-thirds of all the money given directly to politicians,” Ovtchinnikov says, noting that only about 10 percent of firms are actively involved in campaign finance. “Individuals are the big players in this game.”

But it’s companies that are reaping the most recognizable benefits. Ovtchinnikov says firms located in areas that most intensely target “economically relevant” politicians see positive changes in return on asset (ROA) and market-to-book ratios. The bottom-line boost that comes from campaign donations is similar to investing in a new research-and-development or capital-expenditure project.


Further, the economic benefit to firms strengthens when donations come from areas that have high unemployment rates—even if the politicians on the receiving end do not live in that district.

The new study also finds that political contributions flow disproportionately from companies’ home districts to key members of Congressional committees with jurisdiction over their industry. “What you’re seeing is an ability for people to reach politicians with dollars when they can’t reach them with votes,” Ovtchinnikov says.

The net result is that a significant amount of political donations come from narrow geographic clusters. Between 1991 and 2008, for example, three small areas around New York, Chicago and Washington, D.C., accounted for 11.7 percent of all campaign contributions—$425.9 million—even though they represented less than 2 percent of the population.

While the most recent study examined individual donations, a previous study by Ovtchinnikov and others published last year in The Journal of Finance shows a correlation between corporate political donations and higher stock returns.

David Parsley
David Parsley

“Our results … suggest an extremely high rate of return for firms participating in the political contribution process,” Ovtchinnikov and his co-authors write. “Alternatively, it is possible that politicians find it most beneficial to grant favors to large firms because those are the firms that generate the largest amount of tax revenues and jobs.”

In a similar study, David Parsley, the E. Bronson Ingram Professor in Economics and Finance, has found that corporate lobbying is “positively related” to a firm’s financial performance. In that study—where the top five firms in the U.S. accounted for 42 percent, or $160 million, of the total amount spent on lobbying in 2005—Parsley says that portfolios of companies engaged in the most intense lobbying efforts significantly outperformed their benchmark peers.

“Firms in this category earned an excess return of 5.5 percent over the three years following portfolio formation, while the rest of the firms earned essentially a zero excess return,” Parsley and his co-authors write. They do note, however, that the study’s results indicate that the gains were achieved through defensive lobbying, suggesting that simply spending the most on lobbying does not necessarily lead to better financial performance.

For his part, Ovtchinnikov says these studies, by demonstrating that campaign and lobbying expenditures have positive effects on corporate performance, open up intriguing new lines of inquiry for researchers.

“We have shown that firms are benefiting,” he says. “Now we need to begin asking why they benefit.”

Read more about Ovtchinnikov and Parsley.

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