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

48 Pages Posted: 17 Mar 2012 Last revised: 3 Mar 2014

See all articles by Jongsub Lee

Jongsub Lee

University of Florida - Warrington College of Business Administration

Kwang Lee

KAIST College of Business

Nandu J. Nagarajan

University of Texas at Arlington

Date Written: September 1, 2013

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

Suggested Citation

Lee, Jongsub and Lee, Kwang and Nagarajan, Nandu J., Birds of a Feather: Value Implications of Political Alignment between Top Management and Directors (September 1, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2023683 or http://dx.doi.org/10.2139/ssrn.2023683

Jongsub Lee (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

Kwang Lee

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 130-722, 130-722
Korea, Republic of (South Korea)

Nandu J. Nagarajan

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

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