Pay to Play in Investment Management

Abstract

This study investigates the pervasiveness of pay to play in U.S. public pensions. We document a strong positive and statistically significant relation between the presence of government clients for an investment advisory firm and past owner and officer donations to influential state politicians. We use the adoption of SEC Rule 206(4)-5 which prohibited pay to play activities as a quasi-experiment. Prior to rule adoption, advisors that donate have nearly twice the percentage of public pensions in their client base relative to non-donor advisors. We observe a precipitous decline in donations made by advisors catering to public pension plans post-rule enactment.

Keywords: Investment management, public pension plans, political contributions

JEL Classification: G11, G23, G28, H75