Investor Reaction to Covert Corporate Political Activity

Research summary: Citizens United v. Federal Election Commission and subsequent developments created a covert channel for firms to allocate resources from corporate treasuries to political activity. Through the use of a financial market event study of an accidental disclosure of firms' contributions to a Republican nonprofit organization, I examine investors' reactions to covert investment in independent political expenditures. I find that, on average, contributing firms experienced positive abnormal returns around the disclosure event and that these abnormal returns were more positive for firms in heavily regulated industries as well as those previously making campaign contributions to candidates. However, firms that recently faced a shareholder resolution on political spending disclosure experienced negative abnormal returns, suggesting that the controversial nature of covert activity moderated investors' reactions. Managerial summary: The purpose of this study is to examine how investors reacted to an accidental disclosure of firms' investments in “dark money,” a new form of corporate political activity allowed by the U.S. Supreme Court in its Citizens United decision. I find that, on average, investors reacted positively toward firms identified as making these new political investments, especially if the firms previously engaged in electoral politics or operate in heavily regulated industries. However, this reaction turned negative if the firm recently faced a shareholder resolution asking that it voluntarily disclose all of its political investments. An implication for managers is that they should consider their firms' legal and information environments as fully as possible before committing resources to new and potentially controversial political tactics. Copyright © 2017 John Wiley & Sons, Ltd.