Lobbying Expenditures Yield Big Returns for Companies
Significant gains are seen in operating income, market valuation
And yet, despite the rising tempo of criticism, more and more companies are investing more and more bucks in lobbying. In fact, the percentage of firms involved in lobbying activities nearly doubled (to 11.79 percent) between 1998 and 2005, and overall lobbying expenditures rose to $2.83 billion in 2007, a 96 percent increase from 1997 levels. Amidst this dramatic jump came the Lobbying Disclosure Act of 1995, which required registration and reporting for organizations (as well as outside lobbyists) engaging in lobbying activities and offered an unprecedented view of the scope and impact of such activities.David Parsley, Professor of economics and finance at the Vanderbilt Owen Graduate School of Management, set out to explore the validity of this assumption. In research that paints a never-before-seen picture, he reveals that lobbying can, in fact, offer a truly dramatic return on investment.
Lobbying expenditures pay big dividends
Previous research on the impact of corporate political activity had focused mainly on election outcomes or voting behavior—not financial impact—and most previous research focused on corporate contributions from Political Action Committees (PACs). PACs raise money from a company’s constituents and make donations to specific political campaigns in pursuit of special interests. PACs are, however, subject to strict limits on contributions levels and represent only a small portion of political activity.
More important from the company perspective, according to Parsley, is the potential financial yield of lobbying. To pinpoint the financial implications of corporate lobbying on the bottom line, Parsley—along with co-authors Hui Chen of the University of Colorado and Ya-Wen Yang of the University of Miami—compiled a comprehensive database of lobby expenditure records from the Center for Responsive Politics (CRP), and compared them to company financial data from COMPUSTAT and returns and share price data from the Center for Research in Security Prices (CRSP) at the University of Chicago.
Analyzing this dataset of 3,209 firm-year observations, Parsley and his colleagues showed that there is a clear and positive correlation between corporate lobbying expenditures and accounting earnings and cash flows from operations. In fact, on average, company income rose by more than a one-half percent (many millions of dollars for larger companies) for every 10 percent increase in lobbying expenditure.
Parsley also found that the level of lobbying expenditure is significantly and positively correlated to a company’s market valuation and investment return. “The link between Wall Street and K Street is quite compelling, and it gives substantial ammunition to corporate management in justifying to shareholders their investment in lobbying,” he said.
Perhaps even more telling, Parsley discovered that the bigger the investment (relative to firm size) in lobbying, the greater the return. He grouped companies in the study into “portfolios” based upon the level of lobbying activities and tracked their market performance for a three-year period. This revealed that firms with the highest lobbying intensity outperformed market and non-lobbying firm benchmarks by as much as 14 percent in the first year and nearly eight percent over the three years following the lobbying activity.
To ensure the veracity of his findings, Parsley worked painstakingly to eliminate any “self-selection bias”—or whether companies with the highest degree of lobbying activity were also those in the most advantageous position to benefit. Even after he addressed this self-section bias, lobbying still resulted in a big boost to the bottom line.
An uncertain future?
Given the findings of the research, why then isn’t every company getting into the lobbying game? Parsley conjectures that there are several reasons, first and foremost being size. “Firms that lobby tend to be larger, presumably because of the sheer costs involved in such activities,” he says. In addition, lobbying may be the most effective strategy only when other firms in that particular industry remain politically inactive, since more and more players getting involved can diminish the individual returns for companies. In some cases, a firm may not have to engage in lobbying activities because the lobbying efforts of one firm in its industry ends up benefiting other firms as well, resulting in a spillover effect. Finally, lobbying generally requires an ongoing commitment of money and resources, and economic ups and downs that challenge companies’ ability to maintain that commitment—such as the current economic turmoil—may keep them out of the lobbying game altogether.
While questions have been raised about the ethics of corporate lobbying, Parsley points out that all of the activities he studied are perfectly legal. “If people don’t like lobbying, they should change the laws,” he states. “But simply increasing the amount of scrutiny will likely not reduce the size of the lobbyist crowd on K Street, and it is certainly not reducing their impact. Our research shows that the ROI in terms of company revenue and market valuation is too dramatic for the lobbying industry to wither away because of mere criticism.”
Bottom line? Lobbying is a powerful tool that can yield big returns for a fast-increasing number of companies. At the very least, this new depth of understanding on the financial implications of such activities will be a powerful component of a more informed discussion about the merits and demerits of corporate lobbyists in the U.S. political system.
Copyright 2009 Vanderbilt Owen Graduate School of Management