By Viktar Fedaseyeu, Ilona Babenko and Song Zhang

A recently-published examination of the size and nature of individual political contributions has revealed that employees contribute almost three times more to political candidates who are supported by their firm’s CEO than to candidates who lack such support.

Our study drew on a large sample of S&P 1,500 firms between 1999 and 2014, as well as Federal Election Commission (FEC) individual contribution files in the United States, which enabled us to study the relation between political contributions of CEOs and their employees. Our findings show that employees are far more likely donate to candidates supported by their CEOs. This suggests that CEOs directly encourage higher levels of employee contributions, which comprise a significant proportion of all donations received by politicians. Therefore, our research demonstrates that firms’ participation in the political process is not limited to corporate Political Action Committees (PACs), lobbying or direct connections with politicians.

To establish a more direct link between political contributions of employees and their CEOs, we additionally examined cases in which CEOs explicitly advocated for their preferred political candidates (by sending campaign-style letters or hosting fundraising events). In such cases (i.e. when CEOs explicitly engaged in political activities rather than using more informal methods), individual employees donated roughly 6-7 times more to candidates supported by their CEOs. This level of influence is telling, as candidates who are supported by a company’s CEO received, on average, 75% of all donations made by the firm’s employees.

Our work also shows that CEOs’ political influence on their employees may generate firm value (which can come from sources such as favourable regulation, greater subsidies, preferential allocation of government contracts and other benefits). Our study also found that firms experience substantial positive equity returns if CEO-supported candidates won elections. In addition, we found that the relation between CEO and employee contributions was stronger when the firm in question had more to gain from political participation (e.g. when the CEO-preferred candidate had the power to regulate the firm’s industry). Crucially, equity returns were higher around elections won by CEO-supported candidates than around elections won by candidates supported by the employees (but not by the CEO).

Finally, our work shows that political participation can impact employees’ labour market outcomes. In particular, we found that employees whose contributions were not in line with their CEOs’ political preferences were more likely to leave their firms. This evidence suggests that employees are more likely to voluntarily leave firms whose political cultures are different from their own and/or when CEOs make hiring and firing decisions based, in part, on their political preferences. While we were not able to differentiate between voluntary departures and firings, the fact that political preferences have labour market consequences suggests that managers need to pay additional attention to how their political views are perceived by their subordinates.

This article refers to the study entitled, “Do CEOs Affect Employees’ Political Choices?” published in The Review of Financial Studies.

Viktar Fedaseyeu is an Associate Professor of Finance at CEIBS. For more on his teaching and research interests, please visit his faculty profile here. Ilona Babenko is an Associate Professor of Finance at W. P. Carey School of Business, Arizona State University. Song Zhang is a Ph.D. Candidate at Carroll School of Management, Boston College.