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

59 Pages Posted: 27 Mar 2016 Last revised: 1 Oct 2016

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: September 13, 2016

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. This underperformance is driven both by investment category allocation and by poor selection of managers within category. Funds whose boards have high fractions of members who were appointed by a state official or sit on the board by virtue of their government position (ex officio) invest more in real estate and funds of funds, explaining 20-30% of the performance differential. These pension funds also choose poorly within investment categories, overweighting investments in small funds, in-state funds, and in inexperienced GPs with few other investors. Lack of financial experience contributes to poor performance by boards with high fractions of other categories of board members, 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, D83

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 (September 13, 2016). Finance Down Under 2017 Building on the Best from the Cellars of Finance. 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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