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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
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    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

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