How Political Connections Affect Public Pension Fund Investments? Evidence from Close State Elections

Abstract

I investigate how political connections influence public pension funds' investment decisions and performance in private equity markets. Exploiting quasi-random election outcomes from a sample of close U.S. state elections, I find that private equity firms donating to winning candidates who become pension board members are about ten times more likely to receive postelection investments from the pension fund than firms donating to losing candidates. Additionally, private equity funds in which public pension funds invest through political connections exhibit a 5 percentage points lower abnormal internal rate of return, driven partly by abnormal fund fees and home-biased investments.

Keywords: Public Pension Fund, Private Equity, Political Connections, Corruption

JEL Classification: H55, G11, G18, G23