The Determinants and Consequences of Corporate Political Spending Disclosure

Corporate political spending disclosure (CPSD) informs stakeholders about the allocation of corporate funds for political purposes. However, these disclosures often reflect two clear but contradictory characteristics of a firm’s operations. On the one hand, it can enhance accountability and signal good corporate governance; on the other, it can attract regulatory scrutiny, investor criticism, consumer boycotts, and reputational risk, thus increasing uncertainty. Given the sensitive nature of CPSD, numerous researchers have investigated the factors that drive firms to disclose such information, as well as the consequences of doing so. However, most studies have focused on the internal determinants of CPSD, while external factors have received limited attention. In terms of consequences, little is known about how CPSD affects key stakeholders, like auditors, or how they influence a firm’s financial policies. Therefore, this thesis aims to investigate these points through three main studies.The first study in chapter 2 examines whether firms choose to reveal or conceal corporate political spending when they are exposed to geopolitical risk (GPR). GPR is a sub-category of political risk associated with political upheavals, discord, inter-country conflicts, militarisation, and antagonistic situations. This type of risk is different from other external uncertainties in that it can impact firms’ information environment, especially when the information is sensitive one. Drawing inferences from risk-averse perspective using a sample of S&P 500 firms from 2011 to 2021, the chapter finds a negative association between GPR and CPSD. The finding is robust to several rigorous sensitivity and endogeneity tests. This chapter finds that corporate social responsibility (CSR) performance serves as a channel through which GPR reduces CPSD. The cross-sectional analyses reveal that the negative association between GPR and CPSD is more pronounced in firms with higher levels of political investment, lower payouts, and higher international exposure. Additionally, this chapter shows that firms disclose less information about their political spending as a strategic response to minimising risk during times of heightened geopolitical upheaval. However, of the three dimensions of CPSD (disclosure, policy, and oversight), the chapter reveals that GPR is only negatively connected to disclosure. Thus, this chapter advances the literature by highlighting the complex interplay between external uncertainty and corporate disclosure within a dynamic political landscape.The study in chapter 3 explores the extent to which auditors’ fees reflect the perceived risks associated with clients (firms) that disclose political spending. Using a sample of S&P 500 firms from 2011 to 2021, this chapter explores a positive association between CPSD and audit fees. Again, this relationship remains robust across a battery of sensitivity analyses and after addressing any potential endogeneity issues. The channel analysis demonstrates two underlying mechanisms through which CPSD augments audit fees – these being firm-level political risks and earnings management. The cross-sectional analyses reveal that the positive association between CPSD and audit fees is stronger in firms with weaker corporate governance, higher free cash flows, and those in unregulated industries. Further, all three dimensions of CPSD – disclosure, policy, and oversight – are positively associated with audit fees. This chapter, therefore, offers valuable insights for any auditor who must assess a politically transparent client. The findings also help firms make more informed decisions about their disclosures.The study in chapter 4 investigates the impact of CPSD on corporate payouts. Using a sample of S&P 500 firms during 2011 to 2022, this chapter finds a positive association between CPSD and firms’ aggregate payouts, i.e., dividends and share repurchases. The relationship remains robust across various sensitivity analyses and after addressing potential endogeneity concerns. A channel analysis reveals that free cash flow, financial constraints, and institutional shareholding are the key mechanisms through which CPSD enhances corporate payouts. The cross-sectional analyses indicate that the positive association between CPSD and corporate payouts is stronger in firms with greater board independence and higher CSR performance. Interestingly, firms that disclose their political spending tend to opt for more flexible payout strategies, increasing share repurchases without necessarily reducing dividend payouts. Moreover, all three dimensions of CPSD - disclosure, policy, and oversight – are positively associated with corporate payouts. This chapter provides important insights for shareholders, showing that CPSD contributes to increased corporate payouts, effectively transferring wealth to shareholders, which eases their concerns.Overall, this thesis offers important insights for managers, regulators, investors, and auditors alike. For managers, the findings enhance understanding of the risks and strategic implications of CPSD, helping them make more informed decisions about when and how to disclose politically sensitive information. Regulators, in turn, may draw on these insights to design clearer and more consistent frameworks for political spending disclosure, thereby improving transparency and comparability across firms. The thesis also holds significance for investors, who can use CPSD information to better assess firms’ governance quality, risk exposure, and long-term commitment to transparency. Moreover, auditors may benefit from recognising how CPSD influences audit risk and stakeholder trust, particularly when dealing with politically connected clients. Collectively, these contributions underscore the broader value of CPSD research in advancing responsible corporate behaviour and fostering trust among key stakeholders in the corporate environment.