Evidence from the cross-section of institutional variations.

(1)

Student number: S2487608

Name: Marnix Eringa

Study program: MSc IFM, double degree

MSc Accountancy – University of Groningen Supervisor: Dr. S. Mukherjee – University of Groningen

Dr. S. Homroy – University of Groningen

Date: 08-01-2020

Word count: 15,613

Field keywords: Corporate governance, executive remuneration, and board structure

Which politically-connected directors matter more, and where?

Evidence from the cross-section of institutional variations.

(2)

Abstract: Firms use former government officials (FGOs) on the board of directors to create external

linkage with the government. I examine investors’ perception of FGOs on the board of directors and how institutional environments affect it. Using a large sample of 23,444 hand-collected observations from 31 non-U.S. countries, I show that political directors (PDs) are associated with improved investors’ perception. Drawing from political science literature, I theorize and show that former senior bureaucrats (SBDs), but not former ministers (MDs) or government advisors (ADs), drive the improved investors’ perception. Furthermore, I show that stronger institutional environments, measured by economic freedom, lead to less improved investors’ perception of PDs. Here too SBDs drives my results associated with and economic freedom, but not MDs or ADs, lending support to my initial findings.

Keywords: Resource dependency theory, former government officials, senior bureaucrats, investors’

(3)

1. Introduction

The board of directors of a firm is not only important because of its monitoring function (e.g. Adams and Ferreira, 2007; Raheja, 2005), but it also plays an important role in providing other resources to the firm (Pfeffer and Salancik, 1978). These other resources that the board of directors should provide consist of, for example, the specific network and background characteristics of the directors (Ruigrok, Peck, Tacheva, Greve and Hu, 2006). As firms depend on their environment to be successful, the resources that a director brings to the firm should contribute to this (Pfeffer and Salancik, 1978). The government is part of the environment that a firm depends on, so creating an external linkage with the government reduces corporate uncertainty (Pfeffer and Salancik, 1978). Firms can create such an external link by appointing former government officials (FGOs) on their board (Lester, Hillman, Zardkoohi and Cannella Jr., 2008). Existing evidence shows that investors’ perception of political connections is different even within the same institutional context such as the U.S. (e.g. Hillman, 2005; Kang and Zhang, 2018; Hadani and Schuler, 2013). It is also unclear which political connections matter more to investors. Moreover, how investors perceive political connections outside of the U.S. is still fairly unclear due to lack of data and analysis. Moreover, institutions lead to the incentive structures of economies, to survive firms need to comply with the rules and belief systems that are predominant in their environment (North, 1991). Subsequently, differences in the institutional environment will lead to different approaches by firms. Boubakri, Mansi and Saffar (2013) showed this by finding differences in the levels of corporate risk-taking. In this thesis, I will assess if, and which types of political connections on the board of directors affect investors’ perception and what is the role of the institutional environment in this.

The government is an essential external source for success, so prior literature examined the outcomes of FGOs on investors’ perception. Most of the studies in this area are conducted in the United States. Hillman (2005), for example, shows that the investors’ perception of U.S. firms with former

(5)

politicians on their board is favourable. On the other hand, Hadani and Schuler (2013) show that firms from the S&P500 with FGOs on their board experience inferior investors’ perception. In line with this, Kang and Zhang (2018) find that investors in the U.S. greet the announcement of directors who previously worked for any government agency more negatively. FGOs on the board of directors do not only directly impact financial performance, but also operating and accounting performance. Kang and Zhang (2018) find that firms in the U.S. with directors who used to be employed by the government, experience poorer operating performance. This is like the finding of Hadani and Schuler (2013) who find that firms from the S&P500 with FGOs on their board experience inferior accounting performance. Taken together, the evidence from these studies is still unclear if FGOs on the board of directors are beneficial for a firm.

Additionally, as already shown by Hillman (2005) and Hadani and Schuler (2013) there are differences in the outcomes between heavily and less regulated industries. This shows that differences in the institutional environment of firms matter. However, the outcomes of political directors in different institutional environments are still largely unexplored. Hillman and Keim (1995) already argued that it is better to examine the business-government relation by considering differences in institutional contexts. Another void in the current literature relates to the way of measuring political connections. Current studies often assume homogeneity among the different types of FGOs and their resources. Most studies just take all FGOs together (e.g. Kang and Zhang, 2018; Hadani and Schuler, 2013), or focus just on one group (Hillman, 2005) or use alternative measures of political connections, such as campaign contributions (e.g. Kim and Zhang, 2016).

To extend the current literature, I draw on political science to distinguish between different types of

FGOs on the board of directors and how this affects investors’ perception. The resources that

directors bring that create value for the firm are their human and social capital (Hillman and Dalziel, 2003). I expect that FGOs have network-based advantages based on their specific social capital from

(6)

the government, which will differ across different types of FGOs. In line with this, Niskanen (1971) argues in political science that the bureaucrats have an informational advantage over present politicians, like ministers. Wood (1988) shows that bureaucrats can move the decisions of elected institutions in the opposite direction of what is expected based on their organizational hierarchy. In this thesis, drawing on this literature, I will disaggregate the FGOs into three categories: former ministers, senior bureaucrats and government advisors. In terms of building social capital, senior bureaucrats are often employed in influential positions during multiple political cycles, as opposed to other FGOs who are mostly employed or elected for an intermittent political cycle. I have hand-collected data, from non-U.S. countries, on the prior employment of directors which enabled me to classify these different types of FGOs. Not only the differences in social capital of the FGOs will impact their outcomes, but also the institutional environment in which the firm operates. The social capital of the director will impact their abilities directly, where the quality of the institutional environment will affect the circumstances under which they can use their abilities. Taken together, I expect senior bureaucrat directors (SBDs) to bring the most valuable social capital, driving the positive association between politically connected directors and investors’ perception.

Second, in my approach with non-U.S. firms, I can not only assess the impact of political connections outside of the U.S. but also examine the impact of different institutional environments. Excluding U.S. firms, makes the sample more balanced and comparable, which facilitates generalizing the results of different institutional environments. Acemoglu, Johnson and Robinson (2005) argue that political institutions determine a country’s economic policies and institutions. The economic institutions subsequently are responsible for the economic growth in the country. These differences in institutional and economic environments across countries require different approaches from firms to be successful. For example, in countries with less developed institutions, it will be more beneficial and necessary to create a link with the government as the overall economic circumstances are less supportive without it. With a better quality of the government, less corruption and fewer government

(7)

interventions the economic institutions will already be more supportive for firms, which will decrease the need for government linkage. I will assess how differences in the institutional environment of a country affect the investors’ perception of political connections, by using the economic freedom index from the Fraser Institute. Economic freedom measures the quality of the government, highlighting if a country has less-corrupt bureaucracy and less government intervention (La Porta, Lopez-de-Silanes, Shleifer and Vishny, 2002; Mauro, 1995). Therefore, I expect that economic freedom will decrease the need to create external linkage with the government and thus decrease the positive association between politically connected directors and investors’ perception.

My empirical analysis examines the impact of PDs in 31, non-U.S., countries between 2000 and 2015. The hand-collected data on the prior employment of the directors enabled me to distinguish between directors with and without former government employment. I find that the percentage of political directors is positively associated with investors’ perception, measured by the return. This is similar to Hillman’s (2005) findings that politically connected directors are perceived favourably by the investors. In line with the findings from political science that bureaucrats are the driving force behind the government because of their informational advantage (e.g. Niskanen, 1971; Wood, 1988), I find that SBDs are positively associated with investors’ perception. There is no significant association between former ministers or government advisors and investors’ perception when I disaggregate the political connections. This shows that senior bureaucrats are the ones who bring the most valuable social capital owned to their political network throughout the government.

After examining the impact of PDs on investors’ perception, I also assessed the impact of the institutional environment on the association between PDs and investors’ perception. I used the economic freedom index to account for the different institutional environments across the 31 countries in my sample. I find that the positive association between political directors and investors’ perception is less pronounced in countries with more economic freedom. This finding suggests that

(8)

in the eyes of investors a more beneficial institutional environment diminishes the benefits of political directors. Therefore, this confirms the reasoning of Hillman and Keim (1995) that when examining business-government relations it is important to consider differences in the institutional environment. The effect of economic freedom on the association between political directors and investors’ perception is mainly driven by the SBDs. Whereas the former minister and government advisors’ insignificant impact on investors’ perception is not affected by the level of economic freedom. This shows that investors penalize the presence of the senior bureaucrats more in countries with a better institutional environment.

To strengthen my results, I used multiple approaches to counteract the possible endogeneity concerns (Hermalin and Weisbach, 1998) when examining politically connected directors’ investor perceptions. This includes the use of a two-stage instrumental variable (IV) modelling technique (2SLS-model). Following, among others, Lin, Ma, Malatesta, Xuan (2013) and Ye, Deng, Liu, Szewczyk and Chen (2019), I use the country-year-industry averages of political directors as an IV to reduce the endogeneity concerns. I do so as I expect that a firm’s percentage of political directors is correlated with the country-year-industry percentage of political directors, but it is unlikely that the returns of a firm are directly driven by the industry’s historical average political connections. Second, I counteract the possibility of reverse causality using directors’ historical employment as my main identification strategy, as firms can’t retrospectively give a director government experience. Third, I lagged the explanatory variables to overcome other potential sources of reverse causality.

To strengthen my findings on the association between political directors, investors’ perception and different institutional environments, I use two robustness tests. First, to strengthen the finding that it is the senior bureaucrats’ network which is their most valuable resource, I test the impact of the time since the last government appointment of the senior bureaucrats. Lester et al. (2008) found that the human and social capital of FGOs deteriorates over time. My finding shows that the positive

(9)

association between SBDs and investors’ perception is less when the time since their last government appointment is longer. This means that the value of the social capital of senior bureaucrats whose termination of government employment was long ago is perceived less favourable by the investors. To deepen the understanding of how different institutional environments affect the association between political directors and investors’ perception, I examined the impact of the five different sub-scores of the economic freedom index. The sub-sub-scores of the economic freedom index measure the size of the government, strength of the legal system and property rights, money system, the freedom to trade internationally and the restrictions on the product, credit and labour markets. I find that the association between SBDs and investors’ perception is negatively moderated by all five sub-scores. This means that in countries with a smaller government, a stronger legal system and protection of property rights, a sound money system, more freedom to trade internationally or with less regulation on the product, credit and labour markets having SBDs is less valuable.

My results contribute to the existing literature in three ways. First, this thesis contributes by examining the benefits and costs of having politically connected directors, outside of the U.S. Many studies, like Hillman (2005) and Kim and Zhang (2016), solely looked at the U.S. Both studies found that having political connections leads to significant benefits for the firm. Pfeffer and Salancik (1978) argue that to be successful it is important to create an external linkage with elements of a firm’s environment that cause uncertainty and interdependence. Using a similar line of reasoning, I test and show similar results using a sample of 31 non-U.S. countries. This shows that, outside of the U.S. having political directors to create the external linkage with the government leads to better investors’ perception. This strengthens the finding of Hillman (2005) that political connections on the board of directors bring significant benefits to a firm.

Second, with my hand-collected data on the prior employment of the directors I am, to the best of my knowledge, the first to have a detailed classification of different types of FGOs based on political

(10)

science. Other studies on political directors mainly used government employment in general or one certain type of political connection, e.g. politicians (Hillman, 2005; Kang and Zhang, 2018; Lester et al., 2008). However, political science shows that there are differences between different types of government officials. Bureaucrats have an informational advantage over politicians (Niskanen, 1971). Together with the fact that they can turn decisions of elected institutions into the opposite of what is expected based on hierarchy (Wood, 1988), it highlights their importance in the government system. Ministers are indeed important political figures, but often they are only employed for one political cycle, as opposed to senior bureaucrats. As a third category, I used former government advisors to capture the directors that were related to the government but not with active or long employment. By distinguishing between these categories, I show that senior bureaucrats are the type of directors who bring the most valuable social capital to the firm, through their political network. This confirms my expectations set by the political science literature on the importance of bureaucrats. My finding that the impact of senior bureaucrats deteriorates with the time since their last government appointment strengthens the network-based advantage argument.

Third, this thesis adds to the literature on how differences in institutions across countries affect the value of having politically connected directors. Hillman (2005) and Hillman and Keim (1995) argued that different institutional environments have different implications on the outcomes of the relationship between firms and the government. Only a few studies considered the impact of the institutional environment when examining political connections, such as Boubakri et al. (2013). They find that in countries with stronger political institutions, firms take more risk, which is also applicable to firms that are politically connected. I distinguish from their study by examining how the differences in the institutional environment affect the investors’ perception and by assessing how this exactly impacts the value of different types of PDs. Using my international sample and leaving out the countries with a low number of observations left me with the possibility to examine differences in institutions in 31 countries. By using the economic freedom index of the Fraser Institute, I examine

(11)

how formal enabling institutions, according to the framework of Duran, van Essen, Heugens, Kostova and Peng (2019), affect the association between PDs and investors’ perception. I find that the level of economic freedom in a country negatively moderates the positive association of PDs and SBDs with investors’ perception. This supports the Hillman (2005) and Hillman and Keim (1995) view that institutional contexts affect the political directors’ investor perception. So, better institutions partly substitute the need for and benefits of politically connected directors. Additionally, by examining the impact of the five sub-scores of the economic freedom index separately as well, I find consistent results.

The remainder of this thesis is organized as follows. In the next section, I will describe the current literature and develop my hypotheses. In the third section, I will present my research design and variables. Thereafter, I will present the empirical results of my thesis. To conclude, I will summarize and discuss the results of this study.

2. Literature and hypotheses development

2.1. Former government officials on the board and investors’ perception

When trying to understand why firms appoint certain directors, the resource dependency theory from Pfeffer and Salancik (1978) helps us. It states that the board of directors does not only have a monitoring function (Raheja, 2005; Harris and Raviv, 2006; Adams and Ferreira, 2007) but that it also plays an important role in providing other resources to the firm (Ruigrok, Peck, Tacheva, Greve and Hu, 2006). These other resources consist of the directors’ skills (Adams, Akyol and Verwijmeren, 2018), knowledge and expertise, background characteristics and network contacts. Pfeffer and Salancik (1978) state that firms depend on their external environment, including the government, to be successful. One way to create the linkage between the government and the firm is by bringing people into the firm with a connection with the government as one of their resources. Hillman (2005) argues that in the context of creating the external linkage with the government, appointing FGOs

(12)

brings four key benefits (Pfeffer and Salancik, 1978). FGOs on the board provide legitimacy, communication channels to current government officials, bureaucrats and other political decision-makers, influence over political decisions and valuable advice and counsel about the firm’s public policy environment.

The resources that directors bring which create value are their human and social capital (Hillman and Dalziel, 2003). Human capital, an individual’s experience, skills, reputation and knowledge (Becker, 1964; Coleman, 1988), is what all directors bring, the specific social capital of FGOs is what distinguishes them from other directors. Nahapiet and Ghoshal (1998) argued that an individuals’ social capital is the potential and actual resources that are embedded within, derived from and available through their network of relationships. As firms will use FGOs to create linkage with the government through co-option (Selznick, 1949), it will be their social capital that houses their ability to establish these linkages. However, as direct co-optation, having sitting government officials on the board of directors, is impossible, firms wait until their government employment is terminated before the process of co-option starts (Lester et al., 2008). Therefore, the appointment of someone who can create a channel to the government, using their specific background and network, can be used as a strategic asset to obtain a competitive advantage over firms that do not have such political connections (Salamon and Siegfried, 1977; Hillman, 2005).

The advantage of having directors with government experience results from their social capital, which they can use to create the external linkage between the firm and the government. Creating the external linkage with the government is necessary for a firm to be successful (Pfeffer and Salancik, 1978) and mitigates the risks that uncertainty about government regulations create (Selznick, 1949). North (1991) argues that the institutions in a country provide the incentive structure of an economy and that this determines the direction of economic growth in a country. Together with the standard constraints in an economy, the institutions define the choice set and thus the production and

(13)

transaction costs, which determines the profitability and feasibility of engaging in economic activity (North, 1991). Institutional theory indicates that firms must conform to the belief systems and rules that are predominant in their environment, in order to survive (e.g. Scott, 1995; DiMaggio and Powell, 1983). Rajwani and Liedong (2015) show in their literature review that different institutional environments lead to different political strategies, mechanisms used and performance outcomes for firms. This supports that the institutional environment affects the appointments of FGOs to create a link with the government. Therefore, the external government linkage can create value by reducing the risks that firms face regarding the institutional environment in which they operate.

Prior research showed that government linkages indeed can be a strategic asset that leads to a competitive advantage (Hillman, 2005; Salamon and Siegfried, 1977). Political connections lead in several ways to benefits for connected firms over firms without political connections. Correia (2014) finds for example that the Securities and Exchange Commission (SEC) in the U.S. enforces politically connected firms less than firms without political connections. Being suspected to less SEC enforcement and having a higher chance of being bailed out by the government (Duchin and Sosyura, 2012 for the U.S.; Faccio et al., 2006 internationally) are benefits that have other positive outcomes as well. Kim and Zhang (2016) find subsequently that politically connected firms try to maximize these benefits by paying less corporate taxes. Houston et al. (2014) add to the literature on the benefits of political connections that politically connected firms also pay lower costs for their bank loans. In addition to savings on the cost side of the income statement, politically connected firms also have higher levels of corporate risk-taking resulting in less conservative investment decisions (Boubakri et al., 2013). These competitive advantages together imply that the link with the government leads to beneficial outcomes for connected firms. Hillman (2005) supports this view by showing that firms with politicians on the board of directors have better investors’ perception.

(14)

However, the appointment of politically connected directors does not only have positive outcomes for a firm. One of the disadvantages of appointing FGOs is, according to Reeb and Zhao (2013) and Muttakin, Khan and Mihret (2018), that they negatively influence the overall governance quality, as they do not bring the same expertise, knowledge and skills, which are usually required for board members. Kang and Zhang (2018) find another negative impact of FGOs on the board of directors on the governance quality; these directors are more likely to miss board meetings. Since FGOs lead to a lower overall governance quality, this strengthens the expectation that FGOs are not appointed for monitoring purposes (Raheja, 2005; Harris and Raviv, 2006). As the governance quality of a firm has a positive influence on the performance of a firm (Aggarwal, Erel, Stulz, Williamson, 2009; Dahya, Dimitrov, McConnell, 2008), co-opting the government through appointing FGOs, can lead to a subsequent decrease in firm performance. Kang and Zhang (2018) find that firms with FGOs on the board of directors experience poorer operating performance. PDs do not only affect firm performance but also the investors’ perception of a firm, as Kang and Zhang (2018) show that investors greet the announcement of PDs more negatively. The remaining empirical question is how much the above-mentioned benefits of creating the external linkage between the government and firm offset these negative outcomes.

Firms across the world use politically connected directors to provide the external linkage with the government. Resulting from their prior government employment these directors bring their specific social capita, political network, as a resource to the firm. By using their social capital, FGOs reduce uncertainties regarding the institutional environment in which their firm operates. This reduction of risks in the institutional environment comes at the cost of a lower overall governance quality of the firm (e.g. Reeb and Zhao, 2013). Whereas the results of political directors are found to be mixed in the U.S. (Hillman, 2005; Hadani and Schuler, 2013), I expect that outside of the U.S. the investors’ perception of political directors will be positive. Firms can compose their boards in a way that the benefits of bringing resources to the board can offset the negative impact of the FGOs on the board’s

(15)

monitoring purpose. Especially when considering, which type of director, and more specifically

FGO, brings what kind of resource. Therefore, to create external linkage with the government by

using the network of political directors should bring more benefits than disadvantages. Like Pfeffer and Salancik (1978) argued that firms depend on the government, I also expect that investors’ perception of the linkage between the firm and government will be favourable.

H1: Politically connected directors are positively associated with investors’ perception

I expect that there will be differences across different types of FGOs (ministers, senior bureaucrats, and advisors), as their networks, background and skills, knowledge and expertise, differ considerably. In other words, the social capital of different types of FGOs varies, and therefore the perceptions of the investors. So far, research on political connections often focused on campaign contributions (e.g. Kim and Zhang, 2016; Faccio et al., 2006) or used one measure for politically connected directors (e.g. Hillman, 2005; Lester et al., 2008). To gain an understanding of the differences in social capital that ministers, senior bureaucrats and advisors bring to the firm, I draw on the literature from political science. In political science, it is commonly understood that bureaucrats are in a principal-agent relationship with other political authorities such as government ministers (Moe, 2006). In this relationship the ministers are the principals and the bureaucrats the agents, the information asymmetry between the principal and agents arises from the private information and expertise of the bureaucrats (Moe, 2006). Therefore, the approach to political control mainly relates to mitigating the moral hazard and adverse selection problems in the principal-agent relationship between politicians and bureaucrats (Huber and Shipan, 2002; Laffont and Mordimort, 2002). Considering these problems, Niskanen (1971) highlights the informational advantage of bureaucrats towards present politicians, which results from their role as information providers from within the government. This informational advantage of bureaucrats emerges from the fact that they are usually employed during

(16)

multiple political cycles, whereas other government officials, ministers and other advisors are often only employed or elected for an intermittent political cycle.

While in government service, bureaucrats need to develop and maintain a strong network with officials for effective performance in their government role (Lester et al., 2008; Kotter, 1982). Gulick (1937) argues that bureaucrats have a privileged position in the government and that governments need the expert advice of bureaucrats. Wood (1988) empirically shows that the privileged position of bureaucrats is relevant, as the influence of elected institutions is limited when the bureaucrats have substantial resources. Moreover, Wood (1988) shows that when bureaucrats have these substantial resources and a zeal to use them, they can move outputs into complete opposite direction from what hierarchy would predict. This highlights the importance of bureaucrats as a driving force behind the government. This also suggests that directors who were senior bureaucrats can provide political connections and social capital, which are more valuable than that of the other types of FGOs. Therefore, I expect that SBDs are driving the positive association between politically connected directors and investors’ perception. These arguments lead to the following hypothesis:

H1a: Former senior bureaucrats on the board of directors are positively associated with investors’ perception

2.2. Institution of economic freedom, and the relation between political directors and investors’ perception

The institutional environment in a country is important to consider as it is the outcome of the implicit ‘social contract’ between firms and the government (Shocker and Sethi, 1974 p. 67). Shocker and Sethi (1974) describe the social contract as a firm’s willingness to give up some of their resources in return for a beneficial socio-economic infrastructure. Part of the social contract are the institutions that North (1991) describes and which firms use to co-opt the government to minimize their risks from the institutional environment. Prior research has argued that the outcomes of politicians on the board of directors are likely to differ across institutional contexts (Hillman and Keim, 1995; North,

(17)

1990). Rajwani and Liedong (2015) show that there are differences between corporate political activity (CPA) strategies of firms in developed and emerging countries. How differences in the institutional environments, can affect the outcomes of having political directors is, however, largely unexplored (Hillman, 2005). Economic freedom is an outcome of the institutional environment and enables the pursuit of economic objectives based on governmental institutions and policies, which provides actors with resources for starting and sustaining new initiatives. Therefore, according to the framework of Duran et al. (2019), it will show how linkage to formal enabling institutions leads to benefits.

Differences in the institutional environment, measured here as the level of economic freedom, are likely not only to have an impact on the country itself but also on individual firms, for multiple reasons. First, economic freedom captures a country’s rule of law, monetary system, legal origin and government intervention; those factors were found to affect the financial market of a country by La Porta et al. (2002). Second, prior literature suggests that instruments such as modest taxation, the protection of property rights and non-corrupt bureaucracy are important to the quality of government (Mauro, 1995; Easterly and Levine, 1997; De Jong and Schleifer, 1993; North, 1981 and Knack and Keefer, 1995). Which is in line with La Porta et al. (2002) who also argue that the government quality is associated with the levels of government intervention. Finally, economic freedom signals how open and responsive to external sources a country is, which supports the spill-over or diffusion of technology and innovation from other places. The above-mentioned circumstances that create a higher degree of economic freedom improve efficiency and productivity for firms (De Haan and Sturm, 2000; Gwartney, Lawson and Holcombe, 1999), which, in turn, will increase the investors’ perception of a firm.

However, when strong institutions are absent this creates ‘relationship-based capitalism’ (Adhikari, Derashid and Zhang, 2006) where personal ties and connections determine the market environment

(18)

and influence policy. Weak systems of checks and balances are institutional voids, which encourage business managers and owners to engage in politics for personal gains and allow firms and politicians to extract economic rents (Bunkanwanicha and Wiwattanakantang, 2009). These relational strategies affect performance through coercion, acquisition of social capital, corruption or exploiting institutional lapses (Rajwani and Liedong, 2015). Rajwani and Liedong (2015) also show that CPA strategies are more valuable in countries where social capital underlies political and economic exchange. Additionally, Hadani and Schuler (2013) find that CPA is positively associated with financial performance, which proxies investors’ perception in regulated industries. This suggests that investors are likely to perceive PDs less favourably (more favourably) in countries with stronger (weaker) institutions and less (more) regulations.

Acemoglu et al. (2005) argue that through the allocation of political power political institutions determine the economic policies and related institutions. The economic institutions are in turn the ones that are responsible for economic growth, as they shape key economic actors’ incentives. This supports the findings of La Porta et al. (2002) and Mauro (1995) that higher levels of economic freedom result in a better quality of the government with non-corrupt bureaucracy and less government intervention. Together, this supports the expectation that economic freedom, as a measure of formal enabling institutions (Duran et al, 2019), leads to differences in the institutional environment that are likely to affect the value of FGOs’ key resource, their political network. Correspondingly, in countries with less economic freedom, resulting in a bureaucracy that is more corrupt, lower quality of the government and less economic growth, the value of such a political network will be higher as co-opting the government will be easier and more beneficial. Contrarily, co-opting the government will be more complicated in countries with more economic freedom as the quality of the government is higher, there is a less-corrupt bureaucracy and there is more economic growth. Besides, less corruption and fewer government interventions decrease the necessity of political connections for a firm as this leads to a better institutional environment to operate within.

(19)

This will result in the fact that higher levels of economic freedom can diminish the positive influence that political directors have on investors’ perception. Therefore, economic freedom can lower the value of the social capital that a political director brings to the firm. Furthermore, the disadvantages of having politically connected directors will be more striking in a sounder institutional environment, as this decreases the need for the linkage between firms and the government.

The institutional environment impacts the necessity and difficulty of creating external linkage with the government. The benefits of PDs will diminish in countries with a stronger institutional environment and the disadvantages of PDs will be more pronounced. Therefore, the overall impact of the lower governance quality, which results from the presence of PDs (Reeb and Zhao, 2013; Muttakin et al, 2018), will be more striking when the institutional environment is stronger. This means that in countries with more economic freedom, as a measure of the institutional environment, the benefits of having PDs will be valued less and the costs that investors associate with PDs will be higher. Taken together, I expect that in countries with more economic freedom, investors’ perception of PDs will be less favourable. Since senior bureaucrats are the type of FGOs that are likely to have the most valuable political network, I also expect that the positive association between SBD and investors’ perception will be less positive, as investors will penalize firms more in countries with more economic freedom. This results in the following hypothesis:

H2: Economic freedom has a negative moderating effect on the positive association between politically connected directors and investors’ perception

H2a: Economic Freedom has a negative moderating effect on the positive association between former senior bureaucrat directors and investors’ perception

(20)

3.

Research design

3.1. Data

For this thesis, I use panel data over the period 2000-2015 that I collected from a variety of sources. The financial and accounting data is from the Worldscope database. The second database that I used is BoardEx, from which I collected information about the boards. I supplemented the BoardEx data with hand-collected data on the prior employment of directors. The addition of the hand-collected data makes my dataset unique. Other databases that I used are the Fraser Institute (Gwartney, Lawson, Hall and Murphy, 2019) for the economic freedom index and the World Bank for the GDP per capita. After merging the datasets based on director id and firm id, I excluded the observations with missing data. I left the observations from the financial and utility sector out of the analysis as well, which leaves me with the observations from the industrial sector. In the end, I also excluded countries with less than 30 firm year observations. Besides excluding countries with few observations, I also exclude the United States. Including the United States in this sample would mean that most of the observations would be from U.S. firms, which would skew the results into the direction of the U.S. Without the U.S., my sample is more balanced and comparable, which makes the results more generalizable. Using a more balanced sample also increases the strength of the results when assessing the impact of different institutional environments, as suggested by Hillman (2005). These selection criteria result in 23,444 observations from 5,198 different companies located in 31 different countries.

Table 1 shows the descriptive statistics for every country in my thesis. It shows that on average 49%

of the boards have at least one political director, with the highest occurrence of PDs in New Zealand, Poland and Portugal (resp. 84%, 87% and 86% of the boards).

(21)

3.2. Variables

3.2.1 Dependent variable

I measure the investors’ perception through the firm’s one-year buy-and-hold stock market returns. The returns are a market-based measure of performance1 and used before in research related to political connections (e.g. Hillman, 2005; Hadani and Schuler, 2013). I calculate the returns as the logarithmic value of this year’s market capitalization minus the logarithmic value of last year’s market capitalization and winsorized the outcome. The market capitalization of a firm is the total market value in U.S. dollars of the firm’s outstanding shares. Positive returns mean that the stock price of a firm has increased. This implies that the firm is perceived more positively, as the investors are willing to pay more for their shares. Therefore, it proxies the investors’ perception through the interpretation of stock performance. The formula that I used for the calculation of the returns is as follows:

Return = ln (market capitalization) – ln (last year’s market capitalization)

3.2.2 Measuring political connections

In this thesis, I used multiple independent variables to measure the political connections on the board of directors. This results from the fact that I focus on different sorts of FGOs. I use an aggregate measure for political directors (PDs) which I then classified based on their highest government position: minister, senior bureaucrat and advisor. To increase the quality of the data from BoardEx that I used for my classification, I checked the correctness of the functions by hand and added the dates of government employment and extra functions, if available. The hand-collected data classified

PDs as former minister (MD), if they served as a minister, senior bureaucrat director (SBD), if they

had a senior position in the government (e.g. head of department, director, chief of staff, chairman)

1 I use returns instead of Tobin’s Q because of the latter’s shortcomings as highlighted by Lewellen and Badrinath (1997). Especially in an international setting, like in this thesis, the accounting-based denominator of the Tobin’s Q formula causes differences in the

(22)

and former government advisor (AD) if they used to be an advisor or consultant to the government. For this thesis, I left out the military directors2 as I focus only on the civilians (ministers, senior bureaucrats and advisors). I calculate the variables relating to political connections as the percentage of the size of the board of directors that the PDs served on. This means that I divide the number of ministers, senior bureaucrats and advisors, both together and separately, by the board size and winsorized the outcomes. This leads to four variables that measure political connectedness:

percentage of political directors, percentage of minister directors, percentage of senior bureaucrat directors and percentage of advisory directors.

3.2.3 Measuring institutional environments

I measure differences in institutional environments at the country-level by using the Economic Freedom of the world index from the Fraser Institute. I collected the scores for all the applicable countries and years from their annual reports. This index measures the degree to which the policies and institutions of countries are supportive of individuals and corporations to pursue their economic objectives with no interference (Gwartney, Lawson, Hall and Murphy, 2019). The Fraser Institute annually updates the economic freedom index for every country based on the following areas: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation (Gwartney et al., 2019). Hall and Lawson (2014) show in their literature review that the level of economic freedom is positively associated with, for example, employment, gender equality, economic growth, income equality and investment spending. Gwartney et al. (2019) also show that countries with more economic freedom are more entrepreneurial, as many entrepreneurship policies

2 The data on military servants is available in my database and could be assessed separately from the three types of civil servants that I used for this thesis. Military directors have experience in a government system which is mostly separated from the government system that firms try to create external linkage with. The social capital of military directors is different from the ministers, senior bureaucrats and advisors as military directors did not serve as civil servants. Therefore, including military directors does not serve the purpose of examining the impact of former civil servants who now serve as a director.

(23)

involve government interventions that can provide perverse incentives for socially less productive behaviour, distort resource allocations, and undermine economic freedom.

3.2.4 Control variables

The regression model includes several control variables which could possibly affect the investors’ perception of a firm. The set of control variables is mainly taken from previous research on performance (e.g. Fauver et al. 2017; Aggarwal et al. 2009, Doidge, et al., 2004; Gompers, Ishii and Metrick, 2003). I divide the control variables into three categories. The first category relates to the financial performance and characteristics of the firms. The second category consists of control variables that relate to the board characteristics of the firms. The last category controls for differences across the countries that I used in the sample. Appendix 1 shows the description and calculation of the used variables.

3.2.4.1 Financial performance and firm characteristics

To control for firm-specific variables, I include thirteen control variables. To control for profitability, I use return on assets (ROA) and a loss dummy, which takes ‘1’ if the ROA is negative. This is according to Jayachandran, Kalaignanam and Eilert (2013), who find that profitable firms should have better performance. To control for the firm value and growth options, I include Tobins’ Q, as it represents the value created in excess of the costs of assets, which also indicates performance. To control for growth options, in line with Fauver et al. (2017) and Aggarwal et al. (2009), I also include the ratio of R&D to total assets and the ratio of capital expenditures to total assets as control variables. I include the foreign assets divided by the total assets to control as a proxy for the degree of internationalization of a firm as this can affect firm performance (Aggarwal et al., 2009). As intangibles lead to better profitability of firms, I include the intangibles divided by the total assets.

Firm size, measured by total assets, and leverage are commonly used control variables and make sure

(24)

measured by leverage, affects performance. As found before by, among others, Aggarwal et al. (2009) also the ratio of cash that a firm holds will impact its valuation, that is why I include the cash to total assets ratio. To control for ownership structure, I include the percentage of closely held shares as a control variable. To finalize the controls on the firm level, I include the number of business and

geographic segments as complex organizations face more information asymmetry, which affects the

performance (Hope, Kang, Thomas, and Vasvari, 2009; Callen, Hope and Segal, 2005).

3.2.4.2 Board characteristics

Investors’ perception can also be affected by differences in the boards’ structure (e.g. Harris and Raviv, 2006; Fauver et al., 2017). Therefore, I include three control variables regarding the board characteristics. First, I control for the board size, as Harris and Raviv (2006) find that board size can influence the performance of a firm. Second, I control for board independence as Fauver et al. (2017) find that reforms regarding board independence affect firm value. To control for board independence, I use the number of non-executive directors scaled by the board size. Third, to control for differences in governance and monitoring, I include the ratio of supervisory board members to the board size.

3.2.4.3 Country-level variables

As I include multiple countries in the analysis, there can be differences in investors’ perception because of differences on the country level. Therefore, I include three control variables that differ across the countries in the sample. To account for the level of economic development in a country, I include the real gross domestic product per capita (GDP) as a control variable. Aggarwal et al. (2009) and Fauver et al. (2017) both find, but with different signs of the relationship, that the GDP affects the firm value. Second, on the country level, I control for the minority shareholder rights protection. La Porta et al. (2002) find that firms in countries with better minority shareholder protection have higher valuations. To account for the minority shareholder protection, I include the score of Guillén

(25)

under which the firms operate. The conservative dummy turns ‘1’ if the political party in charge is conservative-oriented. With this control, I account for differences and changes in political regimes, as different oriented policies impact firm performance.

3.2.5 Summary

Table 2 shows the descriptive statistics of the dependent, explanatory and control variables that I use

in this study and Table 3 presents the Pearson correlation coefficients of the variables. The outliers in this research are eliminated as I winsorize most of the variables at the 1% level at the top and bottom (see appendix 1). The descriptive statistics in table 2 show that the mean of the logarithmic value of the returns is negative, -0.02, with a standard deviation of 0.56. This shows that the firms in my sample, on average experienced a slight decrease in returns. The mean value of MD is 0.008 (with a standard deviation of 0.03), for SBD this is 0.09 (with a standard deviation of 0.12) and AD has a mean value of 0.003 (with a standard deviation of 0.02). Taken together, this leads to a mean value of 0.10 for PD, which has a standard deviation of 0.13. This means that on average 10.3% of the directors are FGOs, which consist of: 0.8% of the directors in my sample used to serve as a minister, 9.2% as a senior bureaucrat, and 0.3% as a government advisor. The mean value of economic freedom is 7.87, with a standard deviation of 0.59. When looking at the minimum and maximum scores of economic freedom, 5.84-9.12, in my sample, the mean shows that firms in countries with higher scores of economic freedom are slightly more represented.

[TABLE 2] & [TABLE 3]

3.3 Empirical model

3.3.1 Endogeneity concerns

When looking at the categories of political directors on the board of directors in table 3, there are correlations between these percentages and the other variables used to determine the return. This

(26)

1998). Besides, although I use different control variables and year and industry dummy variables to control for possible determinants of returns, my conclusions could be affected by unobserved variables. To tackle these endogeneity concerns, I follow the approach of Lin et al. (2013) and Ye et al. (2019), using the country-industry-year average percentage of political directors to construct an instrumental variable. Many corporate finance studies already used the industry averages as an exogenous instrumental variable (e.g. Adhikari and Agrawal, 2018; Hasan and Cheung, 2018, Ye et al., 2019). A firm’s percentage of political directors is correlated with the country-year-industry average, but it is unlikely that the returns of a firm are directly driven by the industry’s historical average percentage of political directors other than through the effect on the percentage of political directors of an individual firm. For each presented second-stage regression, I will include the coefficient, standard deviation and significance of the first-stage regression to assess the validity of the instrument. The first-stage regression assesses the impact of the country-year-industry average on the percentage of political directors of a firm.

Another cause of endogeneity could be reverse causality, which would mean that better investors’ perception leads to an increase in political or senior bureaucrat directors. To overcome the problems of reverse causality I use two methods. First, I lag all the independent variables by one year. Second, I use the logic from Algan and Cahuc (2010), who avoided reverse causality concerns by using the levels of inherited trust to establish the causal relationship between trust and economic growth. They use the levels of inherited trust as it is well established that someone’s social capital is well predicted by the social capital of their parents. Subsequently, they compare the different levels of trust of forebears between natives and natives whose forebears were migrants. This eliminates the reverse causality possibility that economic growth causes more trust. Therefore, Algan and Cahuc (2010) can establish a causal effect between trust and economic growth across the world. Similar to Algan and Cahuc (2010), I use the prior experience and life-choices of directors as an identification strategy for their social capital. By doing so, I can establish the causal relationship between political directors and

(27)

investors’ perception. A director is not able to retroactively get political experience because of their appointment on the board, like the level of trust which is inherited. Therefore, the difference in prior life-choices and employment tackles this endogeneity concern of PDs. In the light of endogeneity concerns, my interaction variable, economic freedom, can be considered as exogenous, because firms are unable to affect the degree of economic freedom. So, by using an instrumental variable in line with Ye at al. (2019) and Lin et al. (2013), using the director’s past work experience in the government and the fact that economic freedom is exogenous, I treat the endogeneity concerns created by the omitted variable bias and reverse causality.

3.3.2 Model

To tackle the described endogeneity concerns, I use the two-stage least squares (SLS) model in this thesis with data from 2000-2015 consisting of panel data. Using panel data leads to more accurately predicted variables and in general more accurate results, as it allows to control for variables I cannot observe, measure or that change over time. I calculated the country-year-industry averages of the different PDs, using the industry classification of Fama and French (1997) and then include it as the instrument for the individual firm’s PD. The two-stage least squares model for both hypotheses, first examines how the country-industry-year average of the different PDs affects the different categories of PDs on the firm level, shown in equation 1.

Equation 1: PDi, t-1 = β0 + β1 Industry PDi, t-1 + β2 CONTROLSi, t-1 + µi + λt-1 + Ɛi, t-1

Where PDi, t-1 is the percentage of political directors of firm i in year t-1, the year which is used in

equation 2. β1 Industry PD i, t-1 is the country-year-industry average of PDs for firm i in the lagged

year t-1. β2 CONTROLS i,t -1 consists of the used control variables that are described in the prior

paragraph and appendix 1 for firm i in year t-1, because I also lag the controls. µi are the industry

(28)

over time. Λt-1 are the year fixed effects from year t-1, which capture the variables that vary across

years but are constant across the industries in year t. Ɛi,t is the error term for firm i in year t-1.

The second stage of the 2SLS-model, shown in equation 2, uses the instrumental variable to examine how the dependent variable (investors’ perception) is affected by the explanatory variable (PD) and the control variables.

Equation 2: Returni,t = β0 + β1 PD i,t-1 + β2 CONTROLSi,t-1 + µi + λt + Ɛ i,t

New are Returni,t, which is the investors’ perception of firm i in year t, β1 PD i,t-1 is the percentage

of political (total, minister, senior bureaucrat and advisor) directors of firm i in year t-1, as I lag it one year. λt are the year fixed effects, which captures the variables that vary across years but are

constant across the industries in year t. Ɛi,t is the error term for firm i in year t. In the first stage model,

I expect that the country-year-industry average PD is positive and significantly associated with PD on the firm level; this would validate the use of my instrumental variable. In the second stage regression, equation 1, I expect a positive association of PD and SBD with investors’ perception, which would be confirmed by a positive and statistically significant coefficient of β1.

For the second hypothesis, the second-stage model, shown in equation 3, examines by using the instrumental variable, how the interacting variable (economic freedom) affects the association between PDs and investors’ perception.

Equation 3: Returni,t = β0 + β1 PD i,t-1 + β2 Economic freedom i,t-1 +β3 PD i,t-1 * Economic freedom i,t-1

+ β4 CONTROLS i,t`-1 + µi + λt + Ɛ i,t

New in this model is the β2 Economic freedom i,t-1 which is the logarithmic score of economic freedom

that firm i experienced in the lagged year t-1. β3 PD i,t-1 * Economic freedom i,t-1 is the interaction term

between the percentage of political directors and the experienced level of economic freedom for firm i in the lagged year t-1. For the second-stage model, equation 2, I expect that higher levels of

(29)

economic freedom will lower the positive effect of PD and SBD on investors’ perception; the coefficient of β3 should be negative and statistically significant.

4. Main results

4.1. PDs and investors’ perception

Table 4 presents the results of testing the influence of the percentage of FGOs on the board of

directors on the investors’ perception using returns, following equation 1. Column 1 shows the one-year lagged, aggregate effect of the three categories (ministers, senior bureaucrats and advisors) of

PD, in column 2-4 each of the three categories is tested separately while being lagged one year. In

each of the four columns, I also include the one-year lagged control variables relating to differences in financial performance and firm characteristics, board characteristics and the country-level variables. First, table 4 shows that the coefficients of the first-stage model, the association between the country-year-industry averages and firm-level percentages of PDs, are all positive and statistically significant (p<0.01). This shows that the use of my instrument is valid. Second, I find that the coefficient of PD is positive and significant (β=0.14; p<0.01). This shows that an increase in the percentage of political directors leads to a better investors’ perception, which is in line the first main hypothesis (H1) and prior research (e.g. Hillman, 2005). Third, column 3 shows that the coefficient of SBD is positive and statistically significant (β=0.16; p<0.01), which confirms hypothesis H1a that senior bureaucrat directors have a positive impact on investors’ perception. Fourth, senior bureaucrat directors are the main drivers of the positive and statistically significant association between PD and investors’ perception. This is corroborated by the fact that in column 2 and 4, I find that the association between, both, MD and AD and investors’ perception is not statistically significant.

(30)

4.2. Economic freedom and the relation between PDs and investors’ perception

In table 5, I present the results from equation 2, which includes the interaction term of the PDs with economic freedom. The odd-numbered columns (1, 3, 5 and 7) show the models with the explanatory variables (PD and economic freedom) and control variables, but without the interaction term. In the even-numbered columns (2, 4, 6 and 8) I add the interaction term of PD * economic freedom to the previous equation. First, to validate the use of my instrumental variable, I find that the coefficients of the first-stage model, showing the association between the country-year-industry averages and firm-level PD, are all positive and statistically significant (p<0.01). Second, the odd-numbered columns show that the signs of the coefficients of the different types of PDs do not change and, if applicable, stay statistically significant when I include economic freedom in the equation. Third, all the columns show that economic freedom has a positive coefficient which is statistically significant (p<0.05). Therefore, higher levels of economic freedom lead to more favourable investors’ perception, which is in line with my expectations (De Haan and Sturm, 2000; Gwartney et al., 1999). Fourth, column 2 shows that the coefficient of the interaction term of PD and economic freedom is negative and statistically significant (β=-4.85; p<0.10). This confirms hypothesis 2, which predicts that the presence of PDs comes with a higher cost from investors in countries with higher levels of economic freedom. This means that a better institutional environment decreases the positive effect

PDs on investors’ perception. Fifth, column 6 shows that the interaction coefficient of SBD and economic freedom is negative and statistically significant (β=-6.04; p<0.10). This means that higher

levels of economic freedom lead to a less positive association between SBD and investors’ perception, confirming hypothesis 2a. This shows that results from hypothesis 2 are mainly driven by SBD, as column 4 and 8 show no significant impact of economic freedom on the association between, both,

MD and AD and investors’ perception. This is another confirmation that former senior bureaucrats,

rather than former ministers or government advisors, drive the results.

(31)

4.3. Additional analysis

To strengthen the validity of my argument that senior bureaucrats bring the most valuable network to the firm, I additionally test the impact of the last year of their government appointment3. Following Lester et al. (2008), I expect that the value of a senior bureaucrat’s network will deteriorate over time, as the connections of a senior bureaucrat can retire, be replaced or simply feel less obliged to help. Therefore, when more time has passed since their last government appointment the positive association between SBD and investors’ perception, from hypothesis 1a, will be less. Table 6 shows in column 2, that when I interact SBD and time since I find a negative and statistically significant coefficient (β=-0.01; p<0.10) for the interaction term. This means that the value of senior bureaucrats’ social capital of those who terminated government employment long ago is perceived less favourable by the investors. This supports the argument that the network of a senior bureaucrat is their valuable resource, as the value of the network will deteriorate over time (Lester et al., 2008).

[Table 6]

As a second robustness check, I separately examine the impact of the five different components that the economic freedom index of the Fraser Institute consists of. This gives more insight in which institutional contexts affect the association between SBD and investors’ perception. The economic freedom index is based on the assessment of five categories: size of government, legal system and

property rights, access to sound money, freedom to trade internationally, and regulation. In the

odd-numbered columns (1, 3, 5, 7 and 9) of table 7, I present the results from the models where I assess the association of the five sub-scores of the economic freedom index and SBD on investors’ perception. In the even-numbered columns (2, 4, 6, 8 and 10) of table 7, I include the interactions between SBD and the sub-scores of the economic freedom index. I find that, throughout all the

3 For this additional test I use the former senior bureaucrat directors of whom the end date of their government employment was available. My finding relates not to the full sample because of the availability of employment dates. As this criterium decreases the number of observations, this is an out-of-sample test. However, I assume the missing data of the end dates of government

(32)

columns, the positive association between SBD and investors’ perception remains statistically significant (p<0.10) when including the sub-scores of the economic freedom index. This is similar to the finding that SBD is positive and statistically significantly associated with investors’ perception when considering economic freedom, from table 5. All the sub-scores are positively and statistically significantly (p<0.05) associated with investors’ perception, except for freedom to trade

internationally which turns out to be statistically significant and negatively (β=-0.23; p<0.01)

associated with investors’ perception.

In addition, the even-numbered columns show that the interaction coefficients of all five sub-scores with SBD are negative and statistically significant (p<0.10), like the interaction of SBD and economic

freedom in table 5. This means that, first, in countries where markets and personal choices are more

important than political decision-making and governmental budgets, measured by size of government, the association between SBDs and investors’ perception is less positive. Second, when property rights are secured by the rule of law for an efficient allocation of resources, measured by legal & property

rights, the impact of SBDs on investors’ perception is less positive. Third, policies and institutions

that lead to a stable and low inflation rate and avoid making regulations on the use of alternative currencies, measured by sound money, negatively moderate the association between SBDs and investors’ perception. Fourth, in countries with low tariffs, a freely convertible currency, few controls on the movement of human and physical goods and efficient administration and easy clearance of customs, measured by freedom to trade internationally, the association between SBDs and investors’ perception is less positive. Fifth, in countries with less regulations that limit the freedom of exchange in product, credit and labour markets, measured by regulation, the positive association between SBDs and investors’ perception is also less. These five sub-scores are measures, like economic freedom itself, of formal enabling institutions (Duran et al., 2019). Finding that the five sub-scores separately negatively affect the association between SBDs and investors’ perception, shows different possibilities of how different institutional environments affect the outcomes of having SBDs.

(33)

[Table 7]

5. Concluding discussion

In this thesis, I analyse the impact of politically connected directors on investors’ perception around the world, and how differences in the institutional environment affect this. I find that political directors in non-U.S. countries, who can create external linkage with the government, experience more favourable investors’ perception. The percentage of ministers and former government advisors on the board do not lead to a significant change in investors’ perception. My results show that there are differences between the value of the resources, the social capital, that different types of FGOs bring to the board. Providing resources to the firm is one of the roles of the board according to the resource dependency theory (Pfeffer and Salancik, 1978). According to these differences, senior bureaucrats bring the most valuable resource, their political network, to the firm. This supports insights from the political science literature which argue that bureaucrats are the driving force behind the government (Niskanen, 1971; Wood, 1988). In addition, I also find that the time since the senior bureaucrats terminated their government service negatively moderates their positive association with investors’ perception. This suggests that the value of political networks deteriorates over time (Lester et al., 2008). These findings suggest that the recent personal networks of the senior bureaucrats’ matter to the firms the most.

In this thesis, I also analyse how differences in institutional environments affect the association between PDs and investors’ perception. I find that higher levels of economic freedom in a country lead to a less positive association of political and senior bureaucrat directors with investors’ perception. This shows that investors penalize the presence of senior bureaucrat directors more in countries with a better institutional environment. The insignificant association of former ministers and government advisors with investors’ perception is not affected by the level of economic freedom. This highlights once more the importance of the network of senior bureaucrats. Throughout all the

Evidence from the cross-section of institutional variations.

Which politically-connected directors matter more, and where?

Evidence from the cross-section of institutional variations.

Table of contents

1.

Introduction

2.

Literature and hypotheses development

3.

Research design

4.

Main results

5.

Concluding discussion