Similarity Breeds Trust: Political Homophily and CEO-Board Communication

57 Pages Posted: 14 Dec 2021 Last revised: 29 Dec 2021

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong, ABFER, CEPR, and ECGI

Ran Guo

China-ASEAN Institution of Financial Cooperation

Xiao Ren

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: November 18, 2021

Abstract

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

Dasgupta, Sudipto and Guo, Ran and Ren, Xiao and Shu, Tao, Similarity Breeds Trust: Political Homophily and CEO-Board Communication (November 18, 2021). European Corporate Governance Institute – Finance Working Paper No. 808/2021, Available at SSRN: https://ssrn.com/abstract=3966173 or http://dx.doi.org/10.2139/ssrn.3966173

Sudipto Dasgupta

Chinese University of Hong Kong, ABFER, CEPR, and ECGI ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Ran Guo

China-ASEAN Institution of Financial Cooperation ( email )

East Daxue Road #100
Nanning, Guangxi 530004
China

Xiao Ren (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

Tao Shu

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

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