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Did Citizens United Hurt Politically Connected Companies?
Does making political contributions hurt or help a company’s shareholder value? According to a pair of researchers from the University of Oklahoma’s division of finance, “politically connected” companies took a big hit in their market capitalization after the U.S. Supreme Court’s controversial Citizens United v. Federal Election Commission ruling came down in 2010.
That decision caused a public and political uproar by lifting restrictions on corporate spending on political campaigns. So Ashley Newton and Vahap Uysal, in a paper [PDF] featured on Harvard Law School’s corporate governance blog, put the value question to the test using contributions data from the Center for Responsive Politics (CRP) and analyzing market reactions after Citizens United was decided.
The authors deemed corporations to be “historically politically connected” if, prior to Citizens United, they already made large amounts of political contributions—as defined by appearing in the top quintile of the CRP spending data. Conversely, “historically non-politically connected” companies were those that spent only in the bottom quintile of the database.
Among the paper’s findings: in the five days following the Citizens United decision, “historically politically active firms realized a 133 basis point loss relative to their less-connected counterparts.”
Put another way, the politically connected companies experienced “significant negative abnormal returns” following the Citizens United announcements, write Newton and Uysal.
“Specifically,” they add, “historically politically connected firms realized an abnormal price drop of –0.475 percent on announcement date and a cumulative abnormal loss of –1.219 percent five days after announcement date, while historically non-politically connected firms enjoyed positive returns on announcement date in the order of 0.240 percent.”
So what’s going on? The authors also argue the politically connected companies that increased their cash holdings after Citizens United experienced more tensions within the corporation, and demonstrated poorer corporate governance as compared to the non-politically connected companies.
“[P]olitically connected firms with entrenched managers, busy boards of directors, and overcompensated CEOs retain even more cash relative to their well-governed counterparts in the post-Citizens United period,” the paper says.