Marianne Bertrand, Chris P. Dialinas Professor Emeritus of Economics, Booth School of Business, University of Chicago, Matilda Bombardini, Associate Professor, Vancouver School of Economics, UC Berkeley, Haas School of Business, Raymond Fisman, Slater Family Professor of Behavioral Economics at Boston University, Francesco Trebbi, Professor of Business and Public Policy, UC Berkeley, Haas School of Business, and Eyub Yegen, Associate Professor of Finance, Hong Kong University of Science and Technology. Originally published on VoxEU.
Over the past 70 years, the share of institutional investors in publicly traded US companies has increased dramatically, leaving much of the US economy in the hands of a few asset management companies. This column asks about the influence of these investors on political donations made by their portfolio firms. After the purchase of a large block of shares, the firm’s political donations began to reflect the donations made by the investor acquiring them. But corporate political strategies are not driven solely by profits, and regulators interested in corporate influence need to keep an eye on how corporations are run.
Over the past 70 years, the share of institutional investors in US public companies has risen dramatically, from just 6% in 1950 to 65% in 2017. As a result, much of the US economy is now in the hands of a relatively small number. of asset management companies (Bebchuk and Hurst, 2019). The Big Three — BlackRock, Vanguard and State Street Global Investors — owned more than 20% of the S&P 500 in 2017, up from 5% in 1998.
This dramatic change in American corporate ownership has sparked debate among academics and policy makers about its implications. On the one hand, the replacement of small dispersed owners by large institutional investors can reduce the standard corporate agency problem of Berle and Means (1932). It can improve welfare if active, focused shareholders act primarily as effective controllers of management at the portfolio firm level. This shift can also reduce welfare if control is used to maximize the profits of all (perhaps competing) firms in concentrated shareholder portfolios, as some argue in the common ownership literature (Azar and Vives 2021, Anton et al. 2022). On the other hand, institutional investors, especially those who manage index funds or active “mystery indexer” funds, do not have financial incentives to actively oversee management given their remuneration structure and business model (Bebchuk et al., 2017). Proponents of this view often emphasize how little resources even the largest institutional investors spend on managing the companies in their portfolios.
In a new article (Bertrand et al. 2023), we focus on the rise of institutional shareholders: has the concentration of ownership led to a concentration of political power? Researchers, including ourselves (Bertrand et al. 2020), have traditionally assumed that companies’ political strategies were simply extensions of their profit-maximizing business strategies. According to this view, firms donate to campaigns or lobby regulators to pass laws and regulations that benefit the company. However, numerous studies in the field of corporate governance have shown that the goals of companies are determined not by a single focus on corporate profits, but rather by a set of disparate interests held by those who control the resources of the firm.
It is clear that large shareholders – both current and potential – have enormous influence. The top executives of fund families like Blackrock don’t necessarily own a lot of stock themselves, but they effectively control trillions of dollars of investor stock. If the funds run to the exit, the share price will fall, and with it, executive compensation will also fall. Even long-term investing executives have a huge incentive to stay on the side of shareholders and try to ensure that their shares vote with management on board appointments, share buybacks, merger proposals, and political influence issues.
If company executives are trying to make fund managers happy by, say, “winning and dining” at Michelin-starred restaurants, we might be a little worried (although we think Larry Fink can afford to pay his lunch bill). We would be more concerned if portfolio companies committed solid resources to appeal to the political interests of fund managers.
In our article, we ask whether the growth of institutional ownership raises concerns about the concentration of political power (just as others sound the alarm about the growth of institutional investment and, as a result, the concentration of economic power). We do this by examining changes in the spending of portfolio companies’ political action committees (PACs) when large institutional investors buy stakes in these companies. Specifically, we examine how the relationship between 13-F institutional investors’ PAC donation (having at least $100 million in assets under management) and a portfolio firm’s PAC donation changed when an investor acquired a large stake in the firm during the 1980–2018 period. . We show that when these acquisition events occur, there is a significant and discrete increase in the likelihood that the investor and the firm will give money to the same politician, as shown in Figure 1. Conversely, when divestitures occur, the opposite is true.
Picture 1 Company and Investor Provision of PAC: Event Study
Notes: This figure shows the change in the relationship between an investor and a firm’s political action committee (PAC) in an election cycle when an investor buys a large (greater than 1%) stake in a company. The model shows increased similarity in giving after acquisition has occurred. The blue line shows changes around all acquisitions and the red line shows changes around acquisitions that happen because the company is added to the index that the investor tracks in their fund. See Bertrand et al. (2023) for details.
Naturally, investors may decide to buy shares in companies in which they have a concurrence of interests or perspectives. This convergence of interests, which we as researchers do not observe, could explain the increased similarity in political donations around the acquisition. To address these and related issues, we will focus on a subset of investors that are relatively unaffected by such confusions: index-driven acquisitions that encourage passive investors to acquire stakes in companies simply because their mandate is to track a particular index, such as the S&P500 or Russell 2000. In fig. 1 we again see a post-acquisition convergence of political donations that cannot easily be attributed to some unobservable convergence of economic interests or ideologies.
Based on the results described so far, it is not possible to tell whether investors influence portfolio company donations or vice versa. Perhaps investors are adjusting their political strategy to reflect and strengthen the economic interests of the companies they own. In further analysis, we argue that the impact is going in the other direction, as we find that investor donations remain relatively stable during acquisition events, while company donations go through large changes—exactly what we would expect to see if the impact left the investor . to a recently acquired firm that had to adjust its donations to match those of its new owner.
It is possible that the visible influence of large investors occurs without any direct effort on their part. Portfolio companies can proactively cater to investor preferences (political or otherwise) in the hope of gaining their support, for example, in an important vote at shareholder meetings. However, in line with more active institutional investor sentiment, we show that the correlation in political giving rises even more sharply after an investor wins a board seat.
Our main results do not indicate the benefits that asset managers can gain by strengthening their political preferences. They may be financial if the provision of PAC by institutional investors is primarily due to their efforts to influence the legislative and regulatory process in order to increase their profits. But the benefits may be intangible, as the provision of PACs by institutional investors reflects the personal preferences of their managers and owners. We offer suggestive evidence that personal preference may play a role: in particular, we found that our main result of convergence in political giving is more pronounced for investors who are more committed to their own PAC political giving. To the extent that this commitment reflects the personal agenda of investors rather than efforts to influence the legislative and regulatory processes in order to increase profits, this result indicates an increase in the personal politics of those who manage asset management companies.
We started by observing that institutional investors own an increasing proportion of publicly traded firms. This trend was accompanied by an almost sixfold increase in the total political spending of the firms we studied between 1980 and 2018. While there are certainly many factors that influence these patterns, we conclude that increased institutional investment may be at least partially responsible for the expansion. of corporate political presence. We show that higher institutional ownership is associated with an increase in firm giving and that this expansion is not associated with portfolio firms’ own financial interests (which we measure by assessing whether donations go to members of committees lobbied by the firm). These final results support the view that property-driven shifts in political giving may not serve to increase firm profits, but rather serve the fund managers’ own political agendas.
The growth of institutional ownership rightly draws close attention to the implications for financial markets and the economy as a whole. Our results show that these concerns are well founded in the sense that institutional owners do influence the policies of portfolio firms rather than passively allowing corporate executives to do whatever they please. In addition, our findings suggest that concerns about the takeover of US corporations by institutional investors should extend to the political realm.
Editor’s note: This column is largely based on a posting on the Harvard Law School Forum on Corporate Governance. Website.