Do Politically Connected Boards Affect Firm Value?

In our paper “Do Politically Connected Boards Affect Firm Value?” which is forthcoming in the Review of Financial Studies, we explore how pervasive is the impact of political connections on the value of publicly traded U.S. companies. To address this question, the paper focuses on analyzing the value impact of political connections of major U.S. companies, including all companies in the S&P500. Testing for whether political connections impact value requires addressing two basic challenges. The first challenge is to identify and define an exogenous measure of political connections. Given a definition of political connections, the second challenge is to find a setting that would allow one to test whether they do indeed affect company value.

To address the first challenge, the paper employs a unique definition of a company’s political connections based on new hand-collected data, detailing the former political positions held by each of the board members of all companies that are in the S&P500 during the years 1996 and 2000. Information about the political background of board members is then used to sort companies into those that are connected to the Democrats and those that are connected to the Republicans. To address the second challenge, the paper looks at two different events. The first is the 2000 Presidential Election. The second is the announcement of the board nomination of all of the directors that are identified as having a political connection. The hypothesis is that if political connections matter then: 1) companies with political connections to the Republican Party will increase in value upon the Republican win while companies connected to the Democratic Party will suffer a drop in value; and 2) the nomination of a politically connected director to the board will result in an increase in firm value due to the anticipation of future political benefits.

We find that a portfolio of S&P500 companies classified as having a Republican board significantly outperforms in the post-election period a portfolio of S&P500 companies classified as having a Democrat board. We also find that, considered separately, the Republican portfolio exhibits a positive and significant cumulative abnormal return (CAR) following the election. Conversely, the Democrat portfolio exhibits a negative CAR following the election. In addition, we find that a company experiences a positive and statistically significant abnormal stock return following the announcement of a board nomination of a politically connected individual. The positive announcement effect holds true both for Republican and Democrat connected directors. In sum, these results indicate the following two points: First, a company’s value goes up in anticipation of future benefits following the nomination of politically connected individuals. Second, when the director’s political party gains control of the presidency, the value generated by her increases while the value generated by a director connected to the opposing party decreases.

The full paper is available for download here.