Controversial Corporate Political Activities and Shareholder Activism: A Natural Experiment of the U.S. Capitol Riot

Abstract

Corporate political activities (CPA) enable firms to engage in exchanges with politicians, but whether they create economic value for firms and their shareholders hinges on a key aspect of the sociopolitical context—the societal consensus or disagreement over the legitimacy of such exchanges. Using the exogenous shock of the U.S. Capitol Riot and leveraging the novel context of shareholder activism through voting on proposals, we demonstrate that, when a firm’s CPA became more controversial after the Capital Riot, as indicated by firms’ prior campaign contributions to “Objector” politicians who voted to overturn the 2020 Presidential election results, shareholders more actively expressed their concerns over and intention to influence the firm’s CPA by supporting for shareholder proposals advocating for CPA transparency. However, not all shareholders were equally active in this regard. We theorize three mechanisms driving shareholders’ activism, based on which we predict that shareholders that had greater vested interest in firms’ long-term value, were more concerned about backlash on their own reputation through association with controversial CPA, or held stronger socially-oriented goals thus demanding accountability were even more likely to exercise their activism. We empirically demonstrate the heterogeneity among shareholders based on their voting records on CPA-related proposals. These results generate important implications for how firms craft their CPA in the future.