VoxEU Column Politics and economics

Institutional investors and corporate political activism

As US states amass control of business through public pension funds, important questions about potential agency conflicts are raised. This column uses a landmark ruling, which in effect created a new channel of corporate political activism, to investigate this agency conflict. Firms with high institutional ownership have seen lower returns following the ruling. The findings suggest that political connections are an important mechanism of political activism by corporations with state public pension fund ownership.

The US Supreme Court issued a landmark decision on Citizens United v. Federal Election Commission in January 2010, asserting for the first time that corporations benefit from First Amendment protection in terms of freedom of speech regarding independent political expenditures. The ruling generated significant controversy and resulted in a seven-fold increase in independent expenditures to federal elections. President Barack Obama (2010) voiced the opinion of many regarding Citizens United in his subsequent State of the Union Address:

“Last week, the Supreme Court reversed a century of law that I believe will open the floodgates for special interests – including foreign corporations – to spend without limit in our elections. Well I don’t think American elections should be bankrolled by America’s most powerful interests …”

The Council of Institutional Investors (CII) and the Center for Political Accountability (CPA) urged S&P 500 companies in a letter to adopt rules to disclose all corporate political contributions and called on boards to review and approve such contributions (CPA-CII 2010).

This landmark decision is of particular relevance in the context of a postulate brought forward by Adam Smith (1776) more than 200 years ago. He asked for utmost care when dealing with political demands by capital-owners, as their self-interest may significantly deviate from public interest. Capital-owners today are not restricted to businesses such as merchants and master manufacturers. Rather, states have amassed significant amounts of capital and control of business through state pension funds. This raises the important question of whether the actions taken by states as capital-owners have to be considered with the same care as those taken by businesses.

Citizens United provides a unique opportunity to investigate the important question of a potential agency conflict in US public pension funds. In a new paper, we study how firms adjusted their inputs of political activism in response to the Citizens United ruling, and the constraints imposed on them by institutional investors, especially public pension funds (Albuquerque et al. 2016).

Citizens United represents the most dramatic change in corporate campaign financing since the Taft-Hartley Act of 1947 that prohibited corporations from making any expenditure in connection to federal elections. It thus provides a unique experiment to study how corporations with different ownership structures adjust their inputs to political activism. Corporations are not new to political activism and have long used political connections, lobbying, and contributions by executives and Political Action Committees (PAC). We revisit and broaden Adam Smith’s concern by noting that public pension funds are agencies of state governments that could pressure the corporations they’re invested in to pursue political agendas outside the scope of public corporations (e.g. Romano 1993, Mitchell and Hsin 1997). This creates a potential conflict of interest between public pension funds and other shareholders (e.g. Woidtke 2002, Coronado et al. 2003) and raises the important question of whether the market response to Citizens United depends on having institutional investors who may be engaged in political activism themselves.

Using a sample of 1,722 firm-year observations, we find that the average three-day return on the announcement of Citizens United amounts to 0.92%. In the cross-section, firms with more political connections exhibit lower three-day abnormal stock returns than firms with less political connections. While this negative effect is concentrated on firms with high institutional ownership, we find a positive market reaction for the firms with no institutional ownership. A one-standard-deviation increase in the number of political connections sees firms with high institutional ownership receive three-day abnormal returns that are 1.2% lower than for firms with zero institutional ownership – a relative loss of $83 million in market capitalisation. This result is consistent with a general inability of high-institutional-ownership firms with established political connections to adjust to the presence of a new input to political activism.

We further investigate the results above. We show that it is the institutional owners without business ties to the corporation that drive the negative market reaction, suggesting that an arm’s length relationship may be more effective in imposing constraints on management. Most importantly for the purpose of our study, we divide institutions without business ties to the corporation into investment companies, public pension funds, and private pension funds. Consistent with the potential of an agency conflict for states as owners of companies, we find that our main results are concentrated on public pension funds.

To shed more light on this finding, we explore the fact that 23 states had bans on independent political expenditures by corporations on state elections prior to Citizens United – in addition to the federal ban (applicable to all states) of independent political expenditures to federal elections. State bans had been ruled constitutional by the US Supreme Court in 1990 in Austin v. Michigan Chamber of Commerce. The decision in Citizens United overruled Austin and gives rise to a cross-sectional difference that allows the identification of the effect of Citizens United on corporate decisions based on company headquarter state. Corporations headquartered in ban states serve as the treatment group, while corporations in no-ban states form the control group.

Firms in ban states (i.e. the treatment group) on average establish less state-level political connections after Citizens United than firms in no-ban states (i.e. the control group). This effect depends on the level of institutional ownership. Citizens United has had a negative net impact on state-level political connections for low institutional-ownership firms, consistent with an ability to adjust to the presence of the new input. In contrast, high-institutional-ownership firms do not significantly change or even mildly increase state-level political connections after Citizens United. We again divide domestic institutions into several groups and, consistent with our previous results, find that it is the firms with public-pension-fund ownership that do not adjust their connections. This evidence suggests that public pension funds put constraints on firms to not use the new avenue of political activism created by Citizens United.


Albuquerque, R, Z Lei, J Rocholl and C Zhang (2016) “Institutional investors and corporate political activism”, European Corporate Governance Institute (ECGI), Finance Working Paper No 470/2016.

Coronado, J L, E M Engen and B Knight (2003) “Public funds and private capital markets: The investment practices and performance of state and local pension funds”, National Tax Journal, 56: 579–94.

CPA-CII (2010) “CPA-CII write 427 top companies, urge adoption of political disclosure and accountability in response to Citizens United”, Press Release.

Mitchell, O and P-L Hsin (1997) “Public sector pension governance and performance”, In S V Prieto (ed), The economics of pensions: Principles, policies, and international experience, 92–126, Cambridge, UK: Cambridge University Press.

Obama, B (2010) State of the Union Address.

Romano, R (1993) “Public pension fund activism in corporate governance reconsidered”, Columbia Law Review, 93: 794-853.

Smith, A (1776) An inquiry into the nature and causes of the wealth of nations, London: W Strahan.

Woidtke, T (2002) “Agents watching agents? Evidence from pension fund ownership and firm value”, Journal of Financial Economics, 63: 99-131.

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