This essay is based on the working paper “Investing in Influence: Investors, Portfolio Firms, and Political Giving” by Marianne Bertrand, Matilde Bombardini, Raymond Fisman, Francesco Trebbi, and Eyub Yegen.
The American economic and financial landscape has undergone a dramatic transformation in recent decades. One of the most significant shifts is the rise of institutional investors through assets such as pension funds, mutual funds, and hedge funds. These entities now hold a dominant stake in publicly traded companies, raising concerns about the concentration of economic power and its potential impact on various aspects of American life, including in the political sphere.
This growing influence has sparked a crucial debate: Does the rise of institutional ownership translate to a concentration of abnormal political influence? The traditional view has been that companies primarily focus on maximizing profits, which might lead them to support policies and politicians favorable to their bottom line. However, research on corporate governance suggests a more nuanced picture, highlighting the influence of major shareholders on a company's goals and priorities, particularly after substantial equity acquisitions.
In “Investing in Influence,” we delve into this specific concern, investigating whether the increasing power of institutional investors translates to a corresponding concentration of political influence and amplification of their political footprint.
Shedding Light on Political Donations
Our research focuses on a specific indicator of potential political influence: political action committee (PAC) giving by firms and institutional investors. We examine changes in PAC contributions by companies following significant acquisitions of their shares by large institutional investors. The findings are intriguing: there is a substantial increase after such acquisitions in the likelihood of both the investor and the company donating to the same politicians running for Congress.
Accounting for Shared Interests: The Case of Passive Investors
A natural concern arises: Could this observed convergence simply reflect a preexisting alignment of economic interests between the investor and the company? To address this, we focus on a specific type of investor—passive investors. These investors, such as those managing index funds, buy stocks based on predefined market index inclusion criteria and not necessarily on a specific company's political views. Here, the rationale for shared interests weakens significantly and clarifies that, in fact, we identify genuine convergence in political donations upon a large acquisition. This finding suggests the influence may not be solely driven by preexisting economic alignments.
Unveiling the Direction of Influence: Investor or Portfolio Firm?
The observed convergence in political giving patterns poses the question: Who is influencing whom? Our findings suggest that the influence might flow from the investor to the newly acquired portfolio company. To show this, we demonstrate how companies seem to adjust their political giving to align with that of their powerful new shareholders upon acquisition rather than vice-versa. While investors do not modify their giving in the aftermath of a large acquisition, portfolio firms do. Specifically, portfolio firms systematically start contributing to the campaigns of politicians supported by their investors, essentially increasing the firm’s total political giving. (A small portion of a firm’s strategic giving—for example, donations from a bank to a member of the Senate Banking Committee—appears also to be deflected). This additional result aligns with the idea that companies are increasingly responsive to the preferences of major shareholders, particularly when those shareholders control vast amounts of capital. We additionally show that this increased alignment happens during times when management is under threat, either because of an impending vote on a shareholder proposal or when the company is implicated in some event sensitive to ESG (environmental, social, and governance) concerns.
The end result is that this phenomenon contributes to amplifying the investor’s political voice. We estimate that portfolio firms allow the political footprint of an investor to expand by 64 percent, on average, relative to the investor’s own total PAC giving.
Beyond Financial Gains: The Role of Personal Preferences
While a primary motivator for institutional investors might be to influence policies to benefit their financial interests, the potential role of personal preferences of fund managers is also part of our study. We observe a stronger correlation in political giving patterns when focusing on individual donations by fund managers and by investors with a more pronounced partisan alignment in their own PAC contributions. This finding suggests that the personal political agendas of those managing these large investment firms might be playing a role, potentially amplifying their own ideological views through the companies they control. Inasmuch as the personal preferences of fund managers may not be completely aligned with portfolio firms’ profit maximization objectives, this additional finding raises obvious issues for corporate governance.
A Cause for Scrutiny: The Implications
The rise of institutional corporate ownership and its potential impact on the political landscape deserve careful examination. Our research suggests that these powerful investors are not simply passive bystanders. They actively influence the political activities of the companies they control, which may not be in the firms’ best interests. This dissonance raises concerns about the concentration of political influence in the hands of a relatively small number of financial institutions.
While further research is needed to fully understand the long-term implications, our findings highlight the need for a deeper conversation about the evolving relationships among institutional investors, large corporations, and the political process. This conversation should consider potential solutions to ensure a healthy balance between the interests of powerful investors, companies, and the broader American public.
Read the full paper here.
Francesco Trebbi is a professor of business and public policy at the University of California–Berkeley’s Haas School of Business.
This essay is part of the Corporate Governance Research Brief Series. Research briefs highlight research with policy implications for the regulatory systems that impact corporations.
