Similarity Breeds Trust: Political Homophily and CEO-Board Communication
57 Pages Posted: 14 Dec 2021 Last revised: 29 Dec 2021
Date Written: November 18, 2021
We find that similarity of political views between the CEO and independent directors (“political homophily”) encourages the CEO to share adverse information with the board. Firms with higher political homophily have lower stock price crash risk, and are more likely to divest previously acquired assets with poor performance. Furthermore, the effect of political homophily is complemented by strong shareholder governance which prevents friendly board from insulating the CEO in the case of ex post negative outcomes. Our identification utilizes the exogenous variation in political beliefs associated with the entry of a conservative television network in local markets. Our findings show that a friendly board facilitates CEO-board communication which is crucial for the board to function effectively in its advisory role.
Keywords: friendly board, CEO-board communication, political homophily, crash risk, corporate governance
JEL Classification: D72, G32, G34, G41, M12, M14
Suggested Citation: Suggested Citation