Political Experience of Directors and Policy Uncertainty: Evidence from Corporate Investments

86 Pages Posted: 28 Oct 2022 Last revised: 22 Nov 2022

See all articles by Demian Berchtold

Demian Berchtold

University of Bern; Ecole hôtelière de Lausanne

Blake Bowler

Mercer University

Zhe Li

University of Colorado, Colorado Springs

Jiri Tresl

University of Mannheim; Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Date Written: October 28, 2022

Abstract

This paper explores whether directors’ political experience assists firms in navigating through policy uncertainty when making investment decisions. Prior research shows that policy uncertainty results in a decline in corporate investments. We find that these declines attenuate by 49% when companies have politically experienced board members. We also find the effect is driven by directors whose political experience comes from serving on presidential advisory committees. Consistent with the theoretical channel suggested by Pastor and Veronesi (2013), we find that appointments of these directors yield higher abnormal announcement returns during periods of high policy uncertainty, suggesting a decrease in the required political risk premium. We employ mandatory retirements of these directors in an instrumental variable setting to address endogeneity. Cross-sectional tests reveal stronger results for firms exposed to investment irreversibility and firms with more presidential committee insights available to the CEO. Our results are also not driven by government sales or CEO overconfidence. At the macroeconomic level, we do not find that firms with politically experienced directors via presidential committees depress investments in non-experienced peer firms. Also, directors with presidential committee experience are less likely to provide their political insights to firms operating in sin industries or with low corporate social responsibility scores.

Suggested Citation

Berchtold, Demian Simon and Bowler, Blake and Li, Zhe and Tresl, Jiri, Political Experience of Directors and Policy Uncertainty: Evidence from Corporate Investments (October 28, 2022). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022, Available at SSRN: https://ssrn.com/abstract=4260880 or http://dx.doi.org/10.2139/ssrn.4260880

Demian Simon Berchtold

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

Ecole hôtelière de Lausanne ( email )

Route de Cojonnex 18
Lausanne, 1000
Switzerland

Blake Bowler

Mercer University ( email )

United States

Zhe Li

University of Colorado, Colorado Springs ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80918-7150
United States

Jiri Tresl (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Politickych veznu 7
Prague, 111 21
Czech Republic

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