(iPoster) Strategic for What? The Political Economy of Fiduciary Duty and Partisan Firms

• In Event: Poster Sessions: Frontiers in International Political Economy & Advanced Industrial Societies
  In Poster Session: Poster Session: Frontiers in International Political Economy

Abstract

Why do firms engage in politics when material returns are often null or negative? Classic models portray a market for influence where donations strategically trade for policy benefits, yet empirical studies consistently fail to find that corporate political spending generates material returns (Aggarwal, Meschke, and Wang 2012; Fouirnaies and Fowler 2022; Fowler, Garro, and Spenkuch 2020). This leaves a foundational open question: firms seem to be strategic, but for what?

I propose a “Two-Stage Agency” theory to explain strategic actions driven by non-pecuniary motives, focusing on the distinct fiduciary duty regimes and the capital dominance of a few global institutional investors in the US and other advanced economies. I argue that corporate political strategy is, rather than a unitary firm decision seeking profit maximization, the outcome of a principal-agent chain linking the ultimate principals (asset owners) and the two types of agents (institutional investors and managers at invested firms), which behave not only for profit maximization but also for their own ideological preferences.
At Stage 1, shifts in fiduciary-duty rules move institutional investors between pure profit goals and mixed profit-and-ideology ones, a dynamic accelerated by the rise of institutional investors. Under “Pecuniary-Only Regimes” (e.g., Bush 2008, Trump 2020 and 2025), institutional investors are legally restricted to pursuing only financial returns, and under “Pro-Latitude Regimes” (e.g., Obama 2015, Biden 2022), they are explicitly permitted to consider “non-pecuniary” ESG factors, allowing the investors as agents to deviate from their asset owners’ pure profit motive. Next, although these investors seem to play significant roles in forming political actions of invested firms (Coates 2023; Gerardi, Lowry, and Schenone 2024; Jiao 2022), the level of their influence is also affected by the agency problem at Stage 2; variation in corporate governance determines how far firms comply with these investor demands.

I conducted a preliminary event study to estimate a CAR (Cumulative Abnormal Return) of donating firms from the election of their donated candidates in close elections for the US Senate, US House, governor, and state legislatures and found consistent evidence with the Stage 1 agency problem: firms’ political donations, regardless of their target parties, produce significant negative financial returns for donor firms only when legal rules allow institutional investors to pursue “non-pecuniary” goals.

Moreover, I apply this framework to two empirical puzzles. First, as for corporate punishments of extremist nominees, using similar RD designs, Meisels (2025) finds that corporate PACs increasingly penalize extremist nominees, whereas Myers (2025) finds this penalty has collapsed over time (Meisels 2025; Myers 2025). Myers attributes his observation of collapsed penalties to the increasing electoral viability of extremists, but this claim suffers from a significant endogeneity concern: the decline in corporate punishment may have caused, rather than responded to, this extremist viability. Second, regarding motivations of corporate climate lobbying, recent studies using the same dataset to operationalize firms’ business interests with their earnings calls find opposite results; Baehr et al. (2025) find that firms lobby in response to new “market opportunities” (e.g., green subsidies), whereas Jiao et al. (2025) maintain that traditional “regulatory costs” are the primary driver (Baehr, Bare, and Heddesheimer 2025; Jiao, Sun, and Ren 2025).

To test my theory to respond to the three puzzles, I combine high-dimensional panel designs with Bartik instruments for firms’ exposure to partisan owners, leveraging exogenous shocks to passive institutional ownership from reconstitutions of equity indices and their interaction with the regulatory regime type to construct a novel instrument of firms’ exposure to partisan investors. I test whether the partisan ownership only shifts firm behavior when fiduciary rules permit, with two 2SLS models. The first model uses the ownership shock interacted with regulatory regime type, and firm/electoral-cycle fixed effects to estimate the effect of the instrumented partisan exposure on three outcomes: investor–firm ideological alignment measured as cosine similarity of their donation vectors, ideological donations, and the balance between regulatory and opportunity lobbying. The second model adds candidate×cycle fixed effects and an access-to-office index to isolate the investor-pressure mechanism from the competing explanation of increased electoral viability of extremists.

This project unifies work on campaign finance, international political economy, and legal studies, introduces the politics of fiduciary duty and political consequence of “Asset Manager Capitalism” to political science literature, and offers a unified solution to the "strategic for what?" puzzle in corporate political actions.

Author

• Yuto Ota, University of California, Los Angeles