Why Do Firms Engage in Politics? The Role of External Oversight

Abstract

We examine the association between external managerial oversight and corporate political donations. Employing a propensity score matching methodology with firm fixed effects, we find that oversight by institutional investors as well as equity analysts is positively associated with political donations. These results suggest that corporate political donations benefit shareholders and are a form of strategic investment. In additional analysis, we find that political contributions benefit the donating firm’s stock price performance when the firm operates in a highly regulated environment, and that donating firms receive more federal government support. Our results suggest that corporate political activism is a value enhancing endeavor.

Keywords: Political donations; Institutional ownership; Analyst following

JEL Classification: D72; G18; G32; G34