Shareholder Activism and Voluntary Disclosure of Political Spending

Abstract:     
This study examines voluntary political spending disclosures, a setting where disclosure is potentially at odds with firm value maximization. We evaluate disclosure practices of S&P 500 firms by (1) examining factors that motivate activist investors to demand disclosure, (2) determinants of managers’ disclosure choices, and (3) investor reactions to the initiation of disclosure. We find that activist investors, particularly pension funds, do not target firms with entrenched managers, for which investors are most likely to benefit from disclosure. We also find that managers strategically disclose political spending information when net benefits of disclosure are greater, but that investors respond negatively to firms announcing the voluntary adoption of political spending disclosure. This negative reaction is concentrated in firms where a pension fund is responsible for successfully negotiating with the firm to secure the commitment to disclose; for all other firms, the average reaction is zero. In cross-sectional analysis, we find that the market reaction is positively associated with variables that capture investor perceived benefits to disclosure. Taken collectively, our evidence is not consistent with arguments that political spending disclosure enhances investor welfare. Our paper informs the current debate over the need for regulation mandating corporate disclosure of political spending.

Number of Pages in PDF File: 45

Keywords: disclosure, political spending, shareholder proposals

JEL Classification: M41, G38, D72

working papers series