The Political Influence of CEOs

IN US COMPANIES, EMPLOYEES TEND TO FINANCIALLY SUPPORT CANDIDATES PREFERRED BY THEIR CEOS. RESEARCH BY FEDASEYEU EXPLAINS THE MECHANISMS UNDERLYING THIS BEHAVIOR

The Federal Election Commission of the United States promotes the public disclosure of funds raised and spent to influence federal elections as a tool to help voters make informed decisions. Anyone can browse through its website and find, among other things, all contributions from specific individuals sorted by name, date, employer, amount, and recipient. Can a CEO use this kinds of information to become a political force?
 
In Do CEOs Affect Employee’s Political Choices?, Viktar Fedaseyeu of the Department of Finance, Ilona Babenko and Song Zhang used a sample of U.S. firms between 1999 and 2014 to find out that CEOs actually affect the political behavior of the employees. The latter donate three times more money to CEO-supported candidates, an effect that persists even after the turnover of CEOs. In an updated version of the paper, the authors discovered that winning CEO-supported candidates generate higher equity returns than winning candidates supported by employees and not by the CEO. So, CEOs are a political force that influences employees and benefits shareholders, but how they do it?
 
“There are three potential mechanisms of political influence”, Viktar Fedaseyeu says. “First, CEOs may simply provide to their employees information about the political candidate most beneficial to the firm. Second, CEOs may present incentives such as the prospect of promotion. Third, they may coerce their employees, threatening to fire them, for instance”. To understand the mechanism at work, the authors looked at the pattern of political contributions within households. They discovered that members of an household that work for different firms which would benefit from the election of opposing candidates do not refrain from making donations, which would be the wisest thing to do. Actually, they are two or three times more likely to donate for opposing candidates simultaneously. “We do not know if CEOs use incentives or coercive methods, but the evidence says that the information channel alone cannot explain the pattern on employee contributions”.

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by Claudio Todesco