Political Experience of Directors and Policy Uncertainty: Evidence from Corporate Investments
86 Pages Posted: 28 Oct 2022 Last revised: 22 Nov 2022
Date Written: October 28, 2022
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.
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