Could spending on political affairs ensure return on oil investment?

A number of companies have long since believed that corporate spending on political gifts will result in higher gains for their businesses. Unfortunately, one study shows that those who practice this may end up performing badly in the market place.

A research team coming from two major universities (Rice and Long Island) reviewed historical year-end stock valuations and ROAs of more than 900 S&P 1500 firms for a period of 11 years. The group analyzed this data along with total amounts each have spent on political gifts and other donations to political lobbyists.

The team of researchers found out that firms who have shelled out funds for state affairs and political activities were among those who performed quite poorly. Part of the study included the aggregate $5 billion amount which the firms (who are subjects of study) spent on these items.

The final research outcomes are set to be published by fall of this year.

Fellow author of the research study and Rice University Business/Public Policy Professor Doug Schuler points out that a majority of business and strategy books state that these “political” investments do pay off.

Unfortunately, this new study reveals otherwise. Political lobbying and improved market performance do not go hand in hand. Moreover, huge spending on state affairs does not have any major impact on a company’s return on sales (ROS).  It may have, in some cases, resulted in negative profit margins.

The exception to these findings is state-regulated sectors like the oil industry (which include firms that invest in oil exploration), communications, utilities, and insurance. The study reveals that in the long-term, quasi-government firms belonging to said industries benefited from politics-related spending.

One author and professor from Long Island University, Michael Hadani, disclosed that “If you’re regulated and for many years you keep repeatedly investing in (political lobbying), then you’ll realize some return for taking risks and investing in oil exploration and production. Then, and only then, does it makes financial sense”.

Also, the research team discovered that allowing ex-state authorities to sit in the companies’ board of directors resulted in minimal financial gains. The group has sampled more than 70 companies with former state officials serving as board directors.  This study indicates that the participation of these individuals did not help improve the firms’ market performance.