Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds

69 Pages Posted: 27 Mar 2016 Last revised: 25 Apr 2017

Aleksandar Andonov

Erasmus University Rotterdam, Erasmus School of Economics

Yael V. Hochberg

National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Joshua D. Rauh

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: April 14, 2017

Abstract

We examine how political representatives affect the governance of organizations. Our laboratory is public pension funds and their investments in the private equity asset class. Representation on pension fund boards by state officials or those appointed by them — often determined by statute decades past — is strongly and negatively related to the performance of private equity investments made by the fund. Funds whose boards have high fractions of government officials choose poorly within investment categories potentially related to economic development, such as real estate and venture capital. They overweight investments in in-state funds, as well as in funds that are small, have inexperienced GPs, and have few other investors. Lack of financial experience contributes to poor performance of boards dominated by plan participants, but does not explain the underperformance of boards heavily populated by state officials. Political contributions from the finance industry to elected state officials on pension fund boards are strongly and negatively related to performance, but do not fully explain the performance differential.

Keywords: Politicians, Governance, Public Pension Funds, Private Equity, Underperformance, State Officials, Pension Fund Boards

JEL Classification: G11, G23, G28, H75

Suggested Citation

Andonov, Aleksandar and Hochberg, Yael V. and Rauh, Joshua D., Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds (April 14, 2017). Rock Center for Corporate Governance at Stanford University Working Paper No. 226. Available at SSRN: https://ssrn.com/abstract=2754820

Aleksandar Andonov

Erasmus University Rotterdam, Erasmus School of Economics ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Yael V. Hochberg

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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