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- Title
Changes in Firms' Political Investment Opportunities, Managerial Accountability, and Reputational Risk.
- Authors
Skaife, Hollis A.; Werner, Timothy
- Abstract
We use the U.S. Supreme Court's decision in Citizens United v. Federal Election Commission to assess the reputational risks created by political investment opportunities that allow managers to spend unlimited and potentially undisclosed firm resources on independent political expenditures. This new opportunity raises important ethical questions, as it is difficult, and perhaps impossible, under current law for shareholders to hold managers accountable for this investment choice and the reputational risks it entails. Using firms' known political activity as a proxy for managers' likely future use of independent political expenditures, we examine how market participants reacted to Citizens United, conditional on this prior activity and corporate governance attributes related to the concentration of decision rights in senior management and blockholders. The results of our analyses document that firms with both a high level of known political activity and CEO-chairperson of the board duality experienced negative abnormal returns in reaction to Citizens United. In contrast, firms with concentrated ownership experienced positive abnormal returns; however, as known political activity increased, investors discounted the benefits of concentrated ownership. These findings suggest that investors expect this expansion of firms' political investment opportunities to amplify principal-agent problems inherent in corporate political activity. Additionally, our findings provide evidence for those deliberating the mandatory disclosure of firms' investments in politics as a means of increasing managerial accountability to both shareholders and the public.
- Subjects
CITIZENS United v. Federal Election Commission; CAMPAIGN funds; FINANCIAL disclosure policy; POLITICAL campaign laws; INDEPENDENT expenditure political action committees; REPUTATIONAL risk; POLITICAL accountability
- Publication
Journal of Business Ethics, 2020, Vol 163, Issue 2, p239
- ISSN
0167-4544
- Publication type
Article
- DOI
10.1007/s10551-019-04224-6