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Corporate campaign contributions and abnormal stock returns after presidential elections

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Abstract

Contributions by investor-owned companies play major roles in financing the campaigns of candidates for elective office in the United States. We look at the presidential level and analyze contributions by companies before an election and their stock market performance following US presidential elections from 1992 to 2004. We find that companies experienced abnormal positive post-election returns with (i) a higher percentage of contributions given to the eventual winner and (ii) with a higher total contribution given. Hypothetical portfolios of the 30 largest corporate contributors formed according to (i) the percentage of contributions given to the winner in a presidential election and (ii) the total contribution (divided by market capitalization) would have earned significant abnormal returns in the two years after an election. While all results hold for Bill Clinton and George W. Bush, they are stronger by a magnitude of two to three under W. Bush.

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Notes

  1. Contributions are of course also given to provide information to voters, but this need not be the only reason (see, e.g., Austen-Smith 1987; Mueller and Stratmann 1994; Prat 2002; Coate 2004).

  2. Mueller (2003) and Stratmann (2005) for literature overviews and, e.g., Bronars and Lott (1997), Lott (2000), Ansolabehere et al. (2003), and Coate (2004) for evidence that money flows to candidates known to favor an interest group’s opinions. Stratmann (2002) and Coate (2004) argue that candidates can be influenced by contributors, an outcome that is supported in theoretical models by Grossman and Helpman (1994, 1996). However, all of this literature concentrates on congressional votes rather than on policymaking at the presidential level.

  3. We have to limit our study to this period, as until 1991 parties did not have to report “soft money” contributions, so it was literally untraceable (Nelson 2000). As we need to assign contributions specifically to companies, for our analysis elections before 1991 cannot be included in our analysis.

  4. We chose a two-year time horizon for stock returns, as after the mid-term elections the observation window for the next contribution period starts and non-overlapping windows are highly desirable for the statistical analysis. Total contributions include third-party candidates as well. However, the median contribution to third parties equals 0.08% of total contributions and thus have virtually no influence on our results.

  5. Lott (2000) attributes strong growth in contributions to large rents. Maniadis (2009) argues that such contributions, especially by corporations, are important to ensure that politicians do not renege on their promises to support a business-friendly environment.

  6. Here the issue of contribution limits becomes relevant, as, e.g., in an empirical study Stratmann and Aparicio-Castillo (2006) find that the margin of victory for the winning candidate declined in races where there was a spending limit. However, Daniel and Lott (1997) and Lott (2006) argue in the opposite direction.

  7. All growth rates are nominal. Sources: Bureau of Economic Analysis, Thomson Datastream, and Federal Election Commission for GDP, S&P 500, and campaign contribution data, respectively.

  8. Other studies sometimes take each company that contributed, no matter how much (up to 1,200 companies), rather than focusing on the largest contributors. However, we think this might distort results, as only really large contributions should have an influence. By taking all contributions, some papers assign the same weight to each contribution, no matter whether it was $1,000 or $5 million (Aggarwal et al. 2007).

  9. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  10. We classify “government” and “opposition” as the party holding the presidency and the other party respectively, i.e., the Democrats under Clinton formed the government from 1992–2000 and the Republicans under George W. Bush did so during 2000–2008, the last two years of which are beyond the end of our sample.

  11. For a detailed description of all factors, see Fama and French (1993) and the website of Kenneth French: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Note that the factors include all AMEX, NYSE and NASDAQ stocks.

  12. CONT i,j is calculated as the log of the total contribution of a company divided by its market capitalization on Election Day.

  13. We thank one anonymous referee for pointing us to the idea of this test.

  14. Some examples where effects are reported include Lakonishok and Smidt (1988), Ariel (1990), Kohli and Kohers (1992), Kim and Park (1994). Malkiel (2003) and Marquering et al. (2006) claim that after controlling for transaction costs almost all of these “anomalies” fail to deliver positive abnormal returns.

  15. The same lag structure regarding contributions and returns is used as in the previous calculations. Note that a stock may be included in up to two of the six portfolios for a given election. For example, a company making a large total contribution and giving most to the Democrats before a Clinton victory could be included in the CTOT30 and PERCDIFF30 portfolios for that election.

  16. We also ran an OLS-regression for each election cycle separately and found similar results.

  17. Under Clinton defense spending as a percentage of GDP fell from 4.78% in 1992 to 3.00% in 2000. Under Bush it increased to 4.28% of GDP in 2008. In nominal terms defense spending under Clinton remained almost unchanged slightly below $300 billion, while it more than doubled to $616 billion under Bush. Source: Office of Management and Budget, Executive Office of the President; the data was extracted from the Google public data explorer.

  18. We do not show the PERCDIFF31_70- and CTOT31_70-portfolios in this table, as they are of minor interest and are hardly ever significant, which is in line with our expectations.

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Acknowledgements

We thank Michael Hanke, Florian Hauser, Thomas Stöckl, Shyam Sunder, and participants at seminars at the University of Innsbruck and at Yale University for helpful comments. We would also like to thank the Editor and two anonymous referees for very helpful comments and suggestions. Daniel Kleinlercher provided excellent research assistance.

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  1. Department of Banking and Finance, University of Innsbruck, 6020, Innsbruck, Austria

    Jürgen Huber & Michael Kirchler

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  1. Jürgen Huber
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Correspondence to Jürgen Huber.

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We thank Jesus Crespo-Cuaresma, Michael Hanke, and Shyam Sunder for very helpful comments on earlier versions of this paper. Martin Angerer, Daniel Kleinlercher, and Thomas Stöckl provided excellent research assistance. Financial support by the University of Innsbruck is gratefully acknowledged.

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Huber, J., Kirchler, M. Corporate campaign contributions and abnormal stock returns after presidential elections. Public Choice 156, 285–307 (2013). https://doi.org/10.1007/s11127-011-9898-4

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