Sleeping with the Enemy: Political Connections and Firm Risk

Martin A. Rossi (Universidad de San Andres)
Christian A. Ruzzier (Universidad de San Andres)

Abstract: We examine the effect of political connections on market perceptions of firm risk, as measured by a firm’s (equity) beta, and provide causal evidence of an increase in risk when the government appoints directors to a firm’s board. To address endogeneity concerns we exploit a natural experiment in Argentina, where the nationalization of the country’s pension system gave the government the right to appoint directors to some firms’ boards. Our results are not driven by increases in financial leverage or changes in financial performance. We find evidence of a higher payout ratio in politically connected firms, which we suggest could result in increased risk of interference (or expropriation) in politically connected firms.

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