Three Essays on Corporate Political Donations

Abstract

This thesis contains three distinct but interconnected essays that examine corporate political donations and their influence on corporate behaviour among Australian publicly listed firms. In response to the ongoing debate concerning the effectiveness and implications of corporate political engagement, the study consists of three essays examining various aspects of corporate political donations to provide valuable insights into this corporate activity. The thesis attempts to determine whether firms making political donations are engaging in harmful agency behaviour or such donations serve as strategic tools for advancing legitimate business interests through stakeholder relationship management and regulatory engagement.

Using datasets covering the period from 2006 to 2022 with 2,973 to 3,404 firm-year observations, the first essay examines corporate outcomes and reports that firms making political donations exhibit lower levels of cash holdings, higher leverage, and reduced investment efficiency. The second essay investigates earnings quality and reveals that political donations are associated with higher levels of earnings quality across multiple earnings management proxies. The third essay explores tax behaviour and indicates that politically active firms engage in more conservative tax planning rather than aggressive tax-avoidance strategies. These findings highlight competing theoretical explanations for corporate political engagement. The first essay supports agency theory concerns, suggesting that political donations reflect managerial opportunism that harms shareholder value. In contrast, the second and third essays validate legitimacy theory by suggesting that politically active firms, seeking to maintain societal approval and regulatory favour, improve their reporting quality and adopt responsible tax practices. Consequently, this thesis reveals a complex duality in corporate political engagement, where agency costs collaborate with legitimacy benefits. While political donations may lead to suboptimal financial decision-making, they also contribute to enhanced earnings quality and prudent tax behaviour. Firms and investors should therefore consider both potential agency issues and legitimacy advantages when evaluating corporate political activities.

The first chapter provides the introduction to the thesis, discussing its motivation and structure, and offering an overall background on political connections. The second chapter explores the relationship between political donations and corporate outcomes, including cash holdings, leverage, and investment efficiency. The analysis examines multiple political donation measures and conducts additional tests, including endogeneity tests, to ensure reliable results. The third chapter investigates the association between political donations and earnings quality using multiple measures of earnings management. This study employs various political donation and earnings quality measures and performs additional tests, and endogeneity checks to verify the main findings. The fourth chapter analyses the link between political donations and tax avoidance, using different measures of political donations and tax avoidance, and conducting further robustness tests. Finally, the fifth chapter documents the major conclusions, discusses the limitations of the thesis, and outlines suggestions for future research.