A firm-level Analysis of Political Donations and their Impact on Firms' ESG Ratings

This paper aims to explore the interactions between firm-level political connection, environmental, social, and governance (ESG) score, and firms' changes in portfolio allocation toward research and development (R&D). The main question this paper investigates is how being a politically connected firm affects a firm's ESG score through changes in expenditure towards R&D. Through the use of a two-way linear fixed effect model, a firm's political donation amount and change in allocation towards R&D will be used to see the change in ESG. Additionally, a regression analysis will be conducted to investigate an interaction variable that will be used to see how donations, when interacted with R&D change, has effects on ESG. The data set hand-collected primary data, deriving information publicly available via Bloomberg data as well as data harvested via OpenSecrets- a nonprofit that tracks campaign finance and lobbying. The data's main variables of interest include firm-level financial statements and includes relevant information such as the number of employees, price earning ratios, revenue, and an ESG disclosure score. Through use of a panel data set and analysis at the firm level on years of interest (two-year intervals relevant to American presidential elections and midterms), a two-way fixed effects panel regression presents inconclusive results supporting the motivation to grow the data set and continue possible deeper understanding of the subject.

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