Political donations and corporate outcomes

Purpose This study aims to examine the relationship between political donations and three corporate outcomes: cash holdings, leverage and investment efficiency. Rooted in the concept of agency costs, the study suggests that political donations negatively impact cash holdings and investment efficiency while positively affecting leverage. This is due to the undemocratic exchanges and political influence they exert on government policies. Conversely, resource dependency theory proposes that political donations positively influence cash holdings and investment efficiency but negatively impact leverage. Design/methodology/approach The study used publicly available data on political donations from the Australian Electoral Commission. The sample selection includes the top 300 firms listed on the Australian Stock Exchange from 2006 to 2022, resulting in 3,404 firm-year observations. The authors used multivariate ordinary least squares regression to test the relationship, and to address selection bias and endogeneity concerns, the authors used the Heckman selection, entropy balancing and two-stage least squares tests. Findings The study reveals a negative correlation between political donations and cash holdings, while identifying a positive correlation with leverage. In addition, there is a negative relationship between political donations and investment efficiency. These findings highlight agency concerns regarding political donations in Australia. The results remain robust after additional tests and the correction of endogeneity issues. Originality/value The authors add to the extant literature on political donations by examining the impact on various corporate outcomes that translate to financial decision-making made by the firms.