Firm Value and Unregulated Political Donations ---Evidence from an Exogenous Regulation Shock to Soft Money Contributions

The benefits and costs associated with corporate political spending are always in the interests of the general public and investors. Soft money is a special type of political donations, which do not have regulatory limits and are highly subject to agency conflicts. During the decade before it was banned, soft money donation was used to circumvent the restrictions on the fundraising of federal candidates and had increased by 420%. Despite of the controversy, we find that investors still view the benefits of soft money contributions outweigh the costs. Utilizing the surprising outcome of McConnell v. FEC Supreme Court decision as an exogenous and adverse shock to a firm’s ability to contribute soft money, we estimate that the equity market expects about $49 to $59 in return for every dollar of soft money capital.