Firm's Political Affiliation Predicts Likelihood of it Facing Certain Legal Woes, Says University of Miami Study
Coral Gables, Fla. – August 20, 2012 - The likelihood that a firm will face litigation in particular areas is directly related to whether a company leans Democratic or Republican, says a new study by the University of Miami School of Business Administration. The study found that Democratic-leaning firms are less likely than Republican-leaning firms to be sued for environmental, labor and civil rights violations, consistent with the Democratic ideology that places greater value on environmental protection, humanitarianism, and equal opportunity. In contrast, the study found, firms with a Republican culture are less likely than Democratic-oriented firms to face legal action for securities fraud and intellectual property rights violations, consistent with the core Republican values that support business, property rights, market discipline, and limited government regulation.
Researchers first obtained a list of all lawsuits filed against companies between 1993 and 2007, close to 53,000 in all, and then identified the more than 1,700 firms involved in those proceedings. They then categorized them by the type of litigation -- approximately 31,000 civil rights, 3,500 labor, 960 environmental, 3,000 securities, and 5,000 intellectual property lawsuits. (NOTE: Utilities and financial firms were excluded since they are far more subject to regulation and managers have much less discretion over the choice of leverage and firm policies.) Researchers then determined the political culture of those firms using a number of criteria: campaign contributions made by each firm’s CEO and top managers, the Political Action Committees (PACs) each firm supports, and the campaign contributions made by residents of the state in which the company is headquartered.
Key findings include:
- Compared to firms with a Republican culture, Democratic-leaning firms are 13.6 percent less likely to be the subject of employment civil rights litigation, 4 percent less likely to be the subject of labor litigation, and .8 percent less likely to be the subject of environmental litigation.
- Compared to firms with strong Democratic culture, Republican firms are 2.4 percent less likely to be sued for securities violations and 5.6 percent less likely to be sued for intellectual property violations.
- Republican-leaning firms are 8 percent more likely to face litigation in general compared to firms with a strong Democratic culture.
- On average, the stock market reacts more negatively to litigation events involving firms with a Republican culture, perhaps because investors are more surprised. Thus, the relations between political culture and litigation propensity across different domains is not fully recognized by the stock market. Investors hold an incorrect prior belief that Republican firms are less likely to engage in wrongdoing in most domains.
“This study shows that a firm’s propensity to engage in certain types of corporate misconduct is deep-rooted in the culture of the firm and may be very difficult to change,” said Alok Kumar, the Gabelli Asset Management Professor at the University of Miami School of Business, who conducted the study with Irena Hutton and Danling Jiang of Florida State University. “Our findings also indicate that the influence of Republican and Democratic ideologies extends much beyond the political arena.”
About the University of Miami School of Business Administration
The University of Miami School of Business Administration is a leading business school, offering undergraduate business, full-time MBA, Executive MBA, MS, PhD and non-degree executive education programs. One of 12 colleges and schools at the University of Miami, the School is located in a major hub of international trade and commerce and acclaimed for the global orientation and diversity of its faculty, students and curriculum. The School delivers its programs at its main campus in Coral Gables as well as at locations across Florida and abroad. More information about the University of Miami School of Business Administration can be found at www.bus.miami.edu.