Investing in Influence: Investors, Portfolio Firms, and Political Giving

Abstract We examine how the rise of institutional ownership has influenced firms’ political activities. We find that, after the acquisition of a large stake, a firm’s political action committee giving mirrors more closely that of the acquiring investor. Consistent with a causal interpretation, this pattern is also observed for acquisitions driven by new index inclusions. The pattern is stronger when firms’ management faces contentious proposals in shareholder meetings and may thus need institutional investors’ support. We further show that firms’ giving shifts away from business-relevant politicians and is strongly aligned with the individual campaign donations of the institutional investors’ employees. These results, together with the finding that the effects are larger for more “partisan” and privately owned investors, suggest that the influence we uncover is driven by institutional investors’ own political views, rather than a profit-maximizing strategy for the portfolio firms.