Data sources and sample construction

The sample for this analysis comprised 574 institutional investors with at least $100 million in assets under management, collectively managing up to $30 trillion in public equity during the sample period from 1980-2018. The authors used the Thomson-Reuters’ dataset on investors’ portfolios. The sample of portfolio firms includes all public companies that appeared at least once in an investor’s portfolio over the same period and could be matched to the Center for Research in Security Prices (CRSP), which provides detailed financial data on publicly traded companies.

Quantitative results

The paper finds that a large acquisition (one percent or more of outstanding shares) by an institutional investor is associated with increased political giving by both the investor and the firm. The likelihood that an investor and a firm both give to a specific politician is substantially higher after the investor first acquires a large stake in that firm. Additionally, the relationship between the political action committee (PAC) giving of an investor and the PAC giving of a portfolio firm change when the investor first acquires a large stake in that firm.

The authors find that acquisitions by institutional investors increase PAC giving by portfolio firms. They estimate that the magnitude of the increase in the positive association is between 31% and 72%, depending on the specification. Moreover, the results are robust to the inclusion of a wide range of control variables and alternative sample constructions.

Discussion

The authors posit that this increase in political giving may benefit institutional investors as passive investors without actively engaging in efforts to influence portfolio firm management may still hold sway. However, this shift may also reduce welfare if control is used to maximize profits across all (possibly competing) firms in the concentrated shareholders’ portfolios. Moreover, proponents of this view often highlight how few resources even the largest institutional investors spend on stewardship activities for the companies in their portfolios.

The paper sits at the intersection of research on money and influence in politics and research on institutional ownership. While this is a preliminary study on the topic, it raises several ESG issues, such as the role of institutional investors in determining the political outcomes of portfolio firms.

Recommendations

The authors suggest that regulators should require institutional investors to be more transparent about their investments and activities in the political sphere to help investors understand how their holdings may be affected by the political preferences of their managers. Additionally, it should be a requirement for asset managers to disclose their holdings with regards to political donations.

Conclusion

This paper establishes a link between institutional ownership and the political giving of portfolio firms. The study raises questions about the governance role of institutional investors and how they could align their interests with those of their clients. In light of these findings, institutional investors should be more transparent in explaining their political activities to investors, regulators and other stakeholders to demonstrate their alignment of interests and improve their governance practices.