Connecting Campaign Money and Specific Financial Benefits
We know that politicians rake in billions of dollars in campaign contributions. We also know that this money is essential to winning and retaining office. Most often we’re left to speculate on exactly what donors got for their contributions, because the benefits are hidden or hard to quantify. The Heard on the Street column in The Wall Street Journal led me to two interesting papers that quantify the connection between donations and donor benefits.
Justin Lahart of The Journal summarized the findings of research by Michael McDonald, a Ph.D. candidate at the University of Tennessee. Mr. McDonald found that research analysts who make large campaign contributions tend to make better earnings forecasts. By combining the FEC’s database of campaign contributions with I/B/E/S’s records for earnings estimates, Mr. McDonald was able to show that analysts can obtain significant benefits by writing checks to campaigns. 
|Pricing Battles (1997)|
Paying people for true investment insights usually puts analysts on the wrong side of the insider trading laws. However, it is legal for members of Congress to share investment insights with money managers and analysts, and as far as I know, there’s no law that prevents them from incorporating that information into their investment decisions. Moreover, it is perfectly legal for analysts to contribute to individual candidates, PACs, and super PACs. Thus there’s a convenient way for analysts to pay for access to key decision-makers in Washington.
In reading Mr. McDonald’s paper, I ran across a citation to another study by Ran Duchin and Denis Sosyura of the Stephen M. Ross School of Business at the University of Michigan. “The Politics of Government Investment (2012)” shows that those banks that received funding from the Troubled Asset Relief Program (TARP) were managed by executives who tended to make far greater political contributions than managers of banks that did not participate in the program. Moreover, Duchin and Sosyura found that politically active banks in the TARP program performed more poorly than politically less active TARP banks. Since the early days of TARP, I’ve wondered how banks got into the TARP program. The application was only a couple of pages. At the outset the Treasury Department stated publicly that none of the banks were troubled. Yet within six months, it was clear that many TARP recipients were in fact financially troubled. Duchin and Sosyura may have given us the explanation.
Campaign contributions don’t just buy access or influence. Both these papers demonstrate that campaign contributions can buy very specific benefits.