Corporate Lobbying: The Best Investment a Company Can Make

In the wake of the Jack Abramoff lobbying scandal in 2006, the media focused on the potentially huge payoffs from corporate lobbying.

The Washington Post reported that a group of 60 companies saved roughly $100 billion in foreign taxes after spending $1.6 million to help persuade Congress to lower the tax rate on foreign earnings. Fortune also estimated that Lockheed Martin earned a 150,000 percent (!!!) return from its corporate lobbying.

And just yesterday, the New York Times fronted a story describing how the Senate bill meant to help people in danger of foreclosures is loaded with tax breaks for businesses. How did those breaks wind up in the bill? Lobbyists of course.

Researchers have recently turned their attention to the effects of corporate lobbying on company returns in the U.S. and the results confirm the anecdotal evidence: Lobbying may be the best investment a (big) company can make.

This recent study from researchers at the UCLA and UC San Diego found that the more a firm spends on corporate lobbying, the lower the tax rate it pays. Increased spending by $1 produced tax benefits of between $6 to $20.

"These dollar values make lobbying look astonishingly profitable," the researchers say.

And this profit trickles down to stock prices, according to work by Hui Chen of the University of Colorado, David Parsley of Vanderbilt University, and Ya-Wen Yang of the University of Miami.

The researchers focused on money spent through corporate lobbying, which is roughly 20 times the size of donations made through PACs. Looking at lobbying data from 1998 to 2005, they found that a portfolio of companies that spent the most on lobbying relative to their assets outperformed similar non-lobbying stocks by an average of 8 percent per year over three years.

"These results suggest that the stock market does not fully incorporate the value of corporate lobbying activities. If the stock price fully captures the value of a firm's lobbying activities, we would not find an association between lobbying intensity and future stock returns," wrote the researches.

The excess returns diminish after one-year, however, meaning that while investors may initially be pessimistic about a lobbying firm's future returns, they learn to adjust.

The number of lobbying firms has increased in recent years -- from 6.54 percent of public companies in 1998 to 11.79 percent in 2005 -- but it's still nowhere near the entire universe of traded companies. So, if the returns from exercising political influence are this sizable, why don't more companies get in on the action?

The main reason might be size: Lobbying firms are often larger than non-lobbying ones. It could be that bigger firms are more likely to interact with government officials and hence put resources into influencing them. It also may be the case that the lobbying dollars which are made public are only one part of lobbying expenses. In that case, bigger companies may just have more resources to put into lobbying. Or it could be something else -- the research doesn't have an answer yet.

But one thing is clear. Even though lobbying often gets a bad rap, it could be just what your portfolio ordered.

UPDATE
Correction: In the fifth graph above, I did a bad job of quoting the paper I wrote about (link fixed now, thanks Amy). The research, conducted by Brian Richter and Jeffrey Timmons of UCLA and Krislert Samphantharakb of UC San Diego, found that companies spend less in taxes when their corporate lobbying spending increases, not when PAC contributions increase as I had written.