Polarized Corporate Boards

Abstract

Political polarization has increased dramatically in recent decades. Yet, little is known about its economic consequences. Using a large sample of U.S. public firms, we find that polarization between the board of directors and the CEO significantly reduces the likelihood a CEO is fired following poor performance. The mechanism driving this result is an increase in director absenteeism which compromises a board’s monitoring and advising capacity. Finally, we show that polarization in the boardroom ultimately lowers the investment-Q sensitivity. Our findings highlight the real cost of political polarization.

Keywords: Political polarization, Board of directors, CEO turnover, Corporate policy

JEL Classification: P16, G30