Political polarization and corporate political advocacy

Abstract

• We use Capitol Riots of January 2021 to examine the value effects of corporate political advocacy. • Firms operating in a politically polarized environment and with Democrat-leaning employees were more likely to make these announcements, irrespective of firm-level political risks. • The average announcement returns are negative for firms exposed to high polarization and political risks but positive for firms exposed to high polarization and low political risks. • Customer visits to stores, sales turnover, gross margins and profitability increase following announcements for both these groups. • Firms facing high polarization and political risks are more likely to resume PAC donations within a year of the Capitol riots. This paper examines the motivations and financial consequences of corporate political advocacy by examining the pause and subsequent resumption of corporate political donations following the US Capitol riots. Firms operating in a politically polarized environment were more likely to make these announcements, regardless of firm-level political risks. The announcement returns are negative (positive) for firms exposed to high polarization and political risks (high polarization and low political risks). Store footfalls, sales, gross margins, and profitability increase for both these groups. However, firms facing high polarization and political risks are more likely to resume PAC donations within a year of the Capitol riots.