69 Pages Posted: 27 Mar 2016 Last revised: 25 Apr 2017
Date Written: April 14, 2017
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: 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 or http://dx.doi.org/10.2139/ssrn.2754820