Do Politically Connected Boards Affect Firm Value?
36 Pages Posted: 17 Mar 2006
Date Written: August 1, 2006
In countries with a weak legal system and a high level of corruption it has been shown that political connections are valuable to a corporation. This paper explores whether political connections are also important in the U.S., which has well-developed financial markets as well as a strong legal system. The paper uses an original hand-collected data set on the political connections of board members of S&P 500 companies to sort companies into those connected to the Republican Party and those connected to the Democratic Party. An analysis of the stock price response to the announcement of the board nomination of a politically connected director shows a positive abnormal stock return. The paper also analyses the stock price response to the Republican win in the 2000 Presidential Election and finds that companies connected to the Republican Party increase in value while companies connected to the Democratic Party decrease in value. The results further suggest that these effects are more pronounced for larger corporations. Finally, the paper controls for political donations by corporations prior to the 2000 election and finds that, unlike board connections, donations do not predict industry-adjusted abnormal post-election returns.
Keywords: Politics, Boards, Corporate Governance
JEL Classification: G14, G18, G30, G34, G38
Suggested Citation: Suggested Citation