Personal Financial Incentives and Corporate Campaign Contributions

Abstract

We propose a novel explanation for why U.S. corporations make relatively small political contributions despite such contributions' large firm-value benefits. We argue that even large firm-level benefits from political participation become insignificant for shareholders with small equity stakes, which in turn limits corporate PACs' ability to raise funds. Using sudden deaths for identification, we show that shareholder-level returns from making campaign contributions are 600 times smaller than firm-level returns, explaining why many shareholders refrain from contributing. We also document that corporate PACs are financially constrained and that financial incentives of individual contributors are a strong determinant of their political contributions.

Keywords: PACs, Political Contributions, Corporate Political Influence

JEL Classification: D72, G30, G38, P48