IDEAS home Printed from https://ideas.repec.org/p/sad/wpaper/149.html
   My bibliography  Save this paper

Sleeping with the Enemy: The Perils of Having the Government On(the)board

Author

Listed:
  • Santiago Barraza

    (ESCP Business School)

  • Martín A. Rossi

    (Universidad de San Andres)

  • Christian A. Ruzzier

    (Universidad de San Andres)

Abstract

We study the causal effect of unsought political connections on firm value. To address concerns of potential endogeneity and sample-selection bias we exploit the nationalization of Argentina’s pension system, a unique natural experiment yielding exogenous variation in new political connections. We find unsought political connections to have a large negative effect on the value of newly connected firms. Yet this result only materializes when, in addition to becoming a shareholder, the government also obtains the right to appoint directors. Decreased stock liquidity or higher stock volatility do not explain this result, suggesting a channel that decreases expected cash flows to shareholders.

Suggested Citation

  • Santiago Barraza & Martín A. Rossi & Christian A. Ruzzier, 2021. "Sleeping with the Enemy: The Perils of Having the Government On(the)board," Working Papers 149, Universidad de San Andres, Departamento de Economia, revised Dec 2021.
  • Handle: RePEc:sad:wpaper:149
    as

    Download full text from publisher

    File URL: https://webacademicos.udesa.edu.ar/pub/econ/doc149.pdf
    File Function: First version, March 2021
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
    2. Thomas Ferguson & Hans-Joachim Voth, 2008. "Betting on Hitler—The Value of Political Connections in Nazi Germany," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 101-137.
    3. Claessens, Stijn & Feijen, Erik & Laeven, Luc, 2008. "Political connections and preferential access to finance: The role of campaign contributions," Journal of Financial Economics, Elsevier, vol. 88(3), pages 554-580, June.
    4. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
    5. Auriol, Emmanuelle & Straub, Stéphane & Flochel, Thomas, 2016. "Public Procurement and Rent-Seeking: The Case of Paraguay," World Development, Elsevier, vol. 77(C), pages 395-407.
    6. Mara Faccio, 2010. "Differences between Politically Connected and Nonconnected Firms: A Cross‐Country Analysis," Financial Management, Financial Management Association International, vol. 39(3), pages 905-928, September.
    7. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
    8. Agrawal, Anup & Knoeber, Charles R, 2001. "Do Some Outside Directors Play a Political Role?," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 179-198, April.
    9. Ichiro Iwasaki, 2007. "Enterprise Reform And Corporate Governance In Russia: A Quantitative Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(5), pages 849-902, December.
    10. Amy J. Hillman & Albert A. Cannella & Ramona L. Paetzold, 2000. "The Resource Dependence Role of Corporate Directors: Strategic Adaptation of Board Composition in Response to Environmental Change," Journal of Management Studies, Wiley Blackwell, vol. 37(2), pages 235-256, March.
    11. Asim Ijaz Khwaja & Atif Mian, 2011. "Rent Seeking and Corruption in Financial Markets," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 579-600, September.
    12. Shashwat Alok & Meghana Ayyagari, 2020. "Politics, State Ownership, and Corporate Investments," The Review of Financial Studies, Society for Financial Studies, vol. 33(7), pages 3031-3087.
    13. Marianne Bertrand & Francis Kramarz & Antoinette Schoar & David Thesmar, 2018. "The Cost of Political Connections," Review of Finance, European Finance Association, vol. 22(3), pages 849-876.
    14. Federico Cingano & Paolo Pinotti, 2013. "Politicians At Work: The Private Returns And Social Costs Of Political Connections," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 433-465, April.
    15. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.
    16. Kroszner, Randall S & Stratmann, Thomas, 1998. "Interest-Group Competition and the Organization of Congress: Theory and Evidence from Financial Services' Political Action Committees," American Economic Review, American Economic Association, vol. 88(5), pages 1163-1187, December.
    17. Tarek A Hassan & Stephan Hollander & Laurence van Lent & Ahmed Tahoun, 2019. "Firm-Level Political Risk: Measurement and Effects," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 2135-2202.
    18. Bernardo Bortolotti & Mara Faccio, 2009. "Government Control of Privatized Firms," The Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 2907-2939, August.
    19. Burak Güner, A. & Malmendier, Ulrike & Tate, Geoffrey, 2008. "Financial expertise of directors," Journal of Financial Economics, Elsevier, vol. 88(2), pages 323-354, May.
    20. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    21. Hadlock, Charles J & Lee, D Scott & Parrino, Robert, 2002. "Chief Executive Officer Careers in Regulated Environments: Evidence from Electric and Gas Utilities," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 535-563, October.
    22. Tian, Lihui & Estrin, Saul, 2008. "Retained state shareholding in Chinese PLCs: Does government ownership always reduce corporate value?," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 74-89, March.
    23. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    24. James Kai‐sing Kung & Chicheng Ma, 2018. "Friends with Benefits: How Political Connections Help to Sustain Private Enterprise Growth in China," Economica, London School of Economics and Political Science, vol. 85(337), pages 41-74, January.
    25. Eitan Goldman & Jörg Rocholl & Jongil So, 2009. "Do Politically Connected Boards Affect Firm Value?," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2331-2360, June.
    26. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, April.
    27. Eitan Goldman & Jörg Rocholl & Jongil So, 2013. "Politically Connected Boards of Directors and The Allocation of Procurement Contracts," Review of Finance, European Finance Association, vol. 17(5), pages 1617-1648.
    28. Ann Harrison & Marshall Meyer & Peichun Wang & Linda Zhao & Minyuan Zhao, 2019. "Can a Tiger Change Its Stripes? Reform of Chinese State-Owned Enterprises in the Penumbra of the State," NBER Working Papers 25475, National Bureau of Economic Research, Inc.
    29. Boubakri, Narjess & Cosset, Jean-Claude & Saffar, Walid, 2008. "Political connections of newly privatized firms," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 654-673, December.
    30. Wu, Jie, 2011. "Asymmetric roles of business ties and political ties in product innovation," Journal of Business Research, Elsevier, vol. 64(11), pages 1151-1156.
    31. Justin Wolfers & Eric Zitzewitz, 2018. "The "Standard Error" of Event Studies: Lessons from the 2016 Election," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 584-589, May.
    32. Audinga Baltrunaite, 2020. "Political Contributions and Public Procurement: Evidence from Lithuania," Journal of the European Economic Association, European Economic Association, vol. 18(2), pages 541-582.
    33. Jayachandran, Seema, 2006. "The Jeffords Effect," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 397-425, October.
    34. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    35. Helland, Eric & Sykuta, Michael, 2004. "Regulation and the Evolution of Corporate Boards: Monitoring, Advising, or Window Dressing?," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 167-193, April.
    36. Faccio, Mara & Parsley, David C., 2009. "Sudden Deaths: Taking Stock of Geographic Ties," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(3), pages 683-718, June.
    37. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
    38. Titl, Vitezslav & Geys, Benny, 2019. "Political donations and the allocation of public procurement contracts," European Economic Review, Elsevier, vol. 111(C), pages 443-458.
    39. Cetrángolo, Oscar & Grushka, Carlos O., 2004. "Sistema previsional argentino: crisis, reforma y crisis de la reforma," Financiamiento para el Desarrollo 5133, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    40. Wei, Zuobao & Xie, Feixue & Zhang, Shaorong, 2005. "Ownership Structure and Firm Value in China's Privatized Firms: 1991–2001," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(1), pages 87-108, March.
    41. Adams, Renée B. & Ferreira, Daniel, 2009. "Women in the boardroom and their impact on governance and performance," Journal of Financial Economics, Elsevier, vol. 94(2), pages 291-309, November.
    42. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    43. Amore, Mario Daniele & Bennedsen, Morten, 2013. "The value of local political connections in a low-corruption environment," Journal of Financial Economics, Elsevier, vol. 110(2), pages 387-402.
    44. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
    45. Rui J. P. De Figueiredo & Geoff Edwards, 2007. "Does Private Money Buy Public Policy? Campaign Contributions and Regulatory Outcomes in Telecommunications," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(3), pages 547-576, September.
    46. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February.
    47. Yan-Leung Cheung & P. Raghavendra Rau & Aris Stouraitis, 2010. "Helping Hand or Grabbing Hand? Central vs. Local Government Shareholders in Chinese Listed Firms," Review of Finance, European Finance Association, vol. 14(4), pages 669-694.
    48. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    49. Daniel Carvalho, 2014. "The Real Effects of Government-Owned Banks: Evidence from an Emerging Market," Journal of Finance, American Finance Association, vol. 69(2), pages 577-609, April.
    50. Frye, Timothy M. & Iwasaki, Ichiro, 2011. "Government directors and business–state relations in Russia," European Journal of Political Economy, Elsevier, vol. 27(4), pages 642-658.
    51. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 7-26.
    52. Shi, Haina & Xu, Haoping & Zhang, Xin, 2018. "Do politically connected independent directors create or destroy value?," Journal of Business Research, Elsevier, vol. 83(C), pages 82-96.
    53. Masulis, Ronald & Ruzzier, Christian & Xiao, Sheng & Zhao, Shan, 2012. "Do Independent Expert Directors Matter?," MPRA Paper 68200, University Library of Munich, Germany.
    54. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 995-1025.
    55. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(4), pages 1371-1411.
    56. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
    57. Chen, Carl R. & Li, Yingqi & Luo, Danglun & Zhang, Ting, 2017. "Helping hands or grabbing hands? An analysis of political connections and firm value," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 71-89.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Miroslav Palanský, 2021. "The value of political connections in the post-transition period: evidence from Czechia," Public Choice, Springer, vol. 188(1), pages 121-154, July.
    2. Su, Zhong-qin & Fung, Hung-Gay & Huang, Deng-shi & Shen, Chung-Hua, 2014. "Cash dividends, expropriation, and political connections: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 260-272.
    3. Wong, Wai-Yan & Hooy, Chee-Wooi, 2018. "Do types of political connection affect firm performance differently?," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 297-317.
    4. Onal, Bunyamin, 2023. "Do politically connected directors play an information role under policy uncertainty?," Journal of Multinational Financial Management, Elsevier, vol. 68(C).
    5. Park, SeHyun, 2023. "Profitability of politically corrupt firms: Evidence from Romania," Emerging Markets Review, Elsevier, vol. 54(C).
    6. Wang, Fangjun & Xu, Luying & Zhang, Junrui & Shu, Wei, 2018. "Political connections, internal control and firm value: Evidence from China's anti-corruption campaign," Journal of Business Research, Elsevier, vol. 86(C), pages 53-67.
    7. Coulomb, Renaud & Sangnier, Marc, 2014. "The impact of political majorities on firm value: Do electoral promises or friendship connections matter?," Journal of Public Economics, Elsevier, vol. 115(C), pages 158-170.
    8. Carney, Richard W. & Child, Travers Barclay & Li, Xiang, 2020. "Board connections and crisis performance: Family, state, and political networks," Journal of Corporate Finance, Elsevier, vol. 64(C).
    9. Elvira Sojli & Wing Wah Tham, 2017. "Foreign political connections," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(2), pages 244-266, February.
    10. David Schoenherr, 2019. "Political Connections and Allocative Distortions," Journal of Finance, American Finance Association, vol. 74(2), pages 543-586, April.
    11. Yuping Deng & Yanrui Wu & Helian Xu, 2020. "Political Connections and Firm Pollution Behaviour: An Empirical Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(4), pages 867-898, April.
    12. Coulomb, Renaud & Sangnier, Marc, 2014. "The impact of political majorities on firm value: Do electoral promises or friendship connections matter?," Journal of Public Economics, Elsevier, vol. 115(C), pages 158-170.
    13. Chen, Shuo & Yan, Xun & Yang, Bo, 2020. "Move to success? Headquarters relocation, political favoritism, and corporate performance," Journal of Corporate Finance, Elsevier, vol. 64(C).
    14. Ozlem Akin & Nicholas S. Coleman & Christian Fons-Rosen & José-Luis Peydró, 2016. "Political Connections: Evidence From Insider Trading Around TARP," Working Papers 935, Barcelona School of Economics.
    15. Karami, Gholamreza & Mehrani, Sasan & Beik Boshrouyeh, Salman & Ezadpour, Mostafa & Mohebbi, Masoud & Samavat, Milad, 2024. "Political connections and labor investment efficiency," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 568-580.
    16. Cheng, Lei, 2018. "Estimating the value of political connections in China: Evidence from sudden deaths of politically connected independent directors," Journal of Comparative Economics, Elsevier, vol. 46(2), pages 495-514.
    17. Daeheon Choi & Chune Young Chung & Soon-Ihl Samuel Hong & Jason Young, 2020. "The Role of Political Collusion in Corporate Performance in the Korean Market," Sustainability, MDPI, vol. 12(5), pages 1-18, March.
    18. Zhong-qin Su & Hung-Gay Fung, 2013. "Political Connections and Firm Performance in Chinese Companies," Pacific Economic Review, Wiley Blackwell, vol. 18(3), pages 283-317, August.
    19. Ozlem Akin & Nicholas S. Coleman & Christian Fons‐Rosen & José‐Luis Peydró, 2021. "Political connections and informed trading: Evidence from TARP," Financial Management, Financial Management Association International, vol. 50(3), pages 619-644, September.
    20. Banerji, Sanjay & Duygun, Meryem & Shaban, Mohamed, 2018. "Political connections, bailout in financial markets and firm value," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 388-401.

    More about this item

    Keywords

    Political connections; corporate governance; grabbing hand; firm value; government ownership;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H13 - Public Economics - - Structure and Scope of Government - - - Economics of Eminent Domain; Expropriation; Nationalization
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sad:wpaper:149. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Maria Amelia Gibbons (email available below). General contact details of provider: https://edirc.repec.org/data/desanar.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.