What Effect Will Citizens United Have on Shareholder Wealth?

by John Coates for The Harvard Law School Forum, September 30th, 2010.

In Citizens United, the Supreme Court relaxed the ability of corporations to spend money on elections, rejecting a shareholder-protection rationale for restrictions on spending.

The decision was a ‘shock’ to corporate governance of the majority of the largest US companies ­ overturning long-standing understandings about how shareholder money could be used by corporate managers in the political arena. The result is effectively to force future campaign finance regulation to invade and become intertwined with the domain of corporate governance regulation ­ with potential for politicizing that domain in a way that even the Enron crisis and the recent financial meltdown have not achieved.

Little research has focused on the relationship between corporate governance ­ shareholder rights and power ­ and corporate political activity.  In a new paper, Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?, I explore that relationship in the S&P 500 to predict the effect of Citizens United on shareholder wealth. I find that in the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model.  Political activity, in turn, is strongly negatively correlated with firm value.

These findings ­ together with the likelihood that unobservable political activity is even more harmful to shareholder interests ­ imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.  Such laws include the DISCLOSE Act, about which I previously testified before the House(the testimony is available here).

The paper is available here.


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