Navigating Policy Uncertainty: Politically Experienced Directors and Corporate Investment

55 Pages Posted: 28 Jul 2024

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

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

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Abstract

Previous studies show that economic policy uncertainty has been rising steadily since the 1960s (Baker et al. 2014), and that this secular increase has led to harmful economic outcomes such as reduced investment rates (Gulen and Ion 2016). Other studies find that politically connected directors play a unique role in corporate decision making and firm valuation (Goldman, Rocholl, and So 2009). We combine these two lines of research to examine the ability of politically experienced directors (PEDs) to mitigate the harmful investment effects of policy uncertainty. Our results show that the presence of at least one PED on a company board reduces the sensitivity of investment decisions to policy uncertainty by 49% relative to firms without PEDs. We design endogeneity tests in accordance with theoretical predictions and our results remain robust. Overall, our findings confirm that PEDs can significantly reduce the harmful effects of policy uncertainty, consistent with Pastor and Veronesi’s (2013) political risk premium theory and Dixit and Pindyck’s (1994) real options theory.

Keywords: Policy uncertainty, Directors, Political experience, Investment

Suggested Citation

Brockman, Paul and Berchtold, Demian Simon and Bowler, Blake and Li, Zhe and Tresl, Jiri, Navigating Policy Uncertainty: Politically Experienced Directors and Corporate Investment. Available at SSRN: https://ssrn.com/abstract=4908085 or http://dx.doi.org/10.2139/ssrn.4908085

Paul Brockman (Contact Author)

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

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

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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