A hard-fought campaign is over and President Obama has been reelected. Should shareholders take notice? In brief, yes. In the paper, Corporate campaign contributions and abnormal stock returns after presidential elections, forthcoming in Public Choice, we explore the stock market performance of top corporate contributors after the elections that brought Bill Clinton and George W. Bush, respectively, to power. In both cases, the top contributors strongly outperformed the market.
We focus on campaign contributions by corporations before a presidential election and their stock market performance afterwards. From a rent-seeking perspective, companies can have an incentive to spend money for presidential candidates. And, as presidential hopefuls need to raise large sums, campaign contributions by companies and business associations are usually a welcome source of funds. After the 2010 Supreme Court ruling in Citizens United against FEC, which grants companies the same free speech rights (and thus spending in the political process) as those accorded to individuals, corporate campaign contributions are likely to become even more important in the future.
We analyze the effects of campaign contributions from the company’s perspective. Specifically, we explore whether the total contributions of a company and the distribution of contributions to the winner and loser of an election were correlated with abnormal returns to its stocks. Both variables are examined using data from the presidential elections over the four cycles 1992–2004. We find that (i) total contributions given to the winner in a presidential election and (ii) a company’s total contribution (divided by market capitalization) were both positively and significantly related to its stock market performance in the two years after an election. While both effects were visible under Clinton, the amplitude was two to three times larger under Bush.
We further examine whether an investor could have earned economically and statistically significant abnormal returns if he had picked stocks according to contribution data. Here, we find that portfolios of the 30 largest contributors according to (i) the percentage of contributions given to the winner in a presidential election and (ii) total contribution (divided by market capitalization) would have yielded significant abnormal returns. An investor selecting a portfolio according to the percentage of contributions given to the winner in a presidential election would have earned significant abnormal returns of up to 6.6% per year during the first year after an election. Investing in a portfolio formed according to a company’s total contribution would have yielded abnormal annual returns of up to 15.5% for the same observation period.
The full paper is available for download here.