Pay to Play in Investment Management

This study investigates the pervasiveness of pay to play activities in the management of U.S. public pension assets. Our tests show the presence of government clients for an investment advisory firm is strongly associated with past owner and officer contributions to the campaigns of influential state politicians. We use the adoption of SEC pay to play rules in 2011 as a quasi-experiment. Prior to implementation, government clients make up nearly twice the number of clients in an advisor’s client base for donor advisors relative to non-donor advisors. We observe a precipitous decline in donations made by advisors catering to government clients post-rule enactment.