What Effect Will Citizens United Have on Shareholder Wealth?

Posted by John Coates, Harvard Law School, on Thursday September 30, 2010 at 9:11 am
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Editor’s Note: John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post relates to Professor Coates’ working paper, Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?, which is available here.

In Citizens United, the Supreme Court relaxed the ability of corporations to spend money on elections, rejecting a shareholder-protection rationale for restrictions on spending.

The decision was a ‘shock’ to corporate governance of the majority of the largest US companies ­ overturning long-standing understandings about how shareholder money could be used by corporate managers in the political arena. The result is effectively to force future campaign finance regulation to invade and become intertwined with the domain of corporate governance regulation ­ with potential for politicizing that domain in a way that even the Enron crisis and the recent financial meltdown have not achieved.

Little research has focused on the relationship between corporate governance ­ shareholder rights and power ­ and corporate political activity.  In a new paper, Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?, I explore that relationship in the S&P 500 to predict the effect of Citizens United on shareholder wealth. I find that in the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model.  Political activity, in turn, is strongly negatively correlated with firm value.

These findings ­ together with the likelihood that unobservable political activity is even more harmful to shareholder interests ­ imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.  Such laws include the DISCLOSE Act, about which I previously testified before the House(the testimony is available here).

The paper is available here.

  1. It’s difficult to see the limitations on political activity by corporations as having any sort of shareholder protection purpose. Some corporations might benefit from political activity (tobacco, oil); in other cases, it might just be a big waste of money (although I’m having a hard time thinking of corporations whose fate is not bound up at least to some extent in politics). It’s hard to see how you would know this ex ante and even harder to see why you would want a rule prohibiting corporate activity that might, or might not, benefit shareholders. The market is as capable of sorting this out as it is any other kind of corporate expenditure.

    If you are arguing for stronger shareholder rights generally, well, that’s another question for another day.

    Comment by Douglas B. Levene — October 4, 2010 @ 4:37 am

  2. […] value, a recent paper by Harvard Law School’s John Coates published on the Harvard Law School Forum explores the relationship between corporate governance and corporate political activity, and finds […]

    Pingback by Citizens United: The Aftermath | The Murninghan Post — October 4, 2010 @ 3:02 pm

  3. […] who might be curious about how I spend my wonky evenings, the subject for each respective talk was: the effect on shareholder value of the Citizens United ruling and a survey of thoughts on sustainable development in light of the upcoming Rio+20 Conference.) […]

    Pingback by Any questions?… No? « Wanderer Returned — May 18, 2012 @ 3:53 pm


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