Birds of a Feather: Value Implications of Political Alignment between Top Management and Directors

Abstract

For 2,695 US corporations from 1996 to 2009, we find that alignment in political orientation between the chief executive officer (CEO) and independent directors is associated with lower firm valuations, lower operating profitability, and increased internal agency conflicts such as a reduced likelihood of dismissing poorly performing CEOs, a lower CEO pay-performance sensitivity, and a greater likelihood of accounting fraud. Importantly, we show that our results are driven neither by the effects associated with various measures of similarity and diversity within the board nor the effects of local director labor market and political conditions on board structure. We provide evidence that our measure of individual political orientation reflects the person’s political beliefs rather than opportunistic attempts to seek political favor. Overall, our results suggest that diversity in political beliefs among corporate board members is valuable.

Keywords: Political alignment between top management and directors; Firm value; Board independence; Managerial entrenchment; Corporate fraud

JEL Classification: G34