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The purchasing power of political donations

Research by Ahmed Tahoun, Assistant Professor of Accounting at London Business School, investigates the reality of political donations.

By Stuart Crainer 05 March 2014

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When corporations in the US contribute to political campaigns, it is reasonable to assume they might hope for something in return. Some favourable legislation possibly, or a share of a government contract. Indeed, there are many benefits to be obtained from the relationship between firms and politicians. Research suggests politically connected firms can obtain a variety of economic favours, for example, while at the same time providing support to help politicians win elections.


Yet there is no guarantee that politicians will deliver once in power. Equally, politicians may fulfil their sides of such an unspoken agreement, only to see a firm withdraw its contributions, or hedge its bets by funding both the politician and the politician’s opponents. Such uncertainty is unsatisfactory for both firms and politicians.


Unfortunately for the parties involved, a tacit agreement of this kind is difficult to formalise. It is not enforceable in law. There is no recourse to the courts if either firm or politician feels cheated. And, under US law governing this type of behaviour, an explicit fee-for-services contract between a company and politician would be considered bribery.


Ahmed Tahoun, an Assistant Professor of Accounting at London Business School, may have a solution. Tahoun used publicly available data, including information on campaign funding, government contracts, and politicians’ stockholdings, to analyse the effect on the firm-politician relationship when a politician holds stock in a company that is providing them with funding.


Tahoun found, for example, that politicians were more likely to own stock in contributing firms than non-contributing firms; companies obtained private benefits from their mutual relations with politicians, specifically increases in the provision of government contracts; politicians who sold their shares in a firm were less likely to receive contributions from that firm in the future; and, when politicians sold their stock in firms from which they receive contributions, those firms performed poorly following the sale of that stock.


The research, therefore, suggests that share ownership by US politicians can be a useful way to establish a relationship with firms as it ensures the politician acts in the best interest of the firm. By buying stock, the politician ties his or her own interests to those of the firm, and is less likely to take an action that hurts the firm in the future. In turn, the firm has an incentive to support a stock-holding politician during an election, and prolong their time in power. Buying shares and holding on to them over the long term sends out a signal that the politician is willing to establish and maintain a relationship with a particular firm.


Share ownership by US politicians, therefore, appears to provide a degree of certainty that underpins the contribution arrangements between politicians and firms. It is a happy outcome for everyone concerned. Or for both the firms and politicians, at least – Tahoun’s research does not touch on the benefit or otherwise for the citizens of the US.


Resources


Ahmed Tahoun, ‘The role of stock ownership by US members of Congress on the market for political favors’, Journal of Financial Economics (2012)

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