What Happens to Listed Firms When Their Managers or Board Members Join Politics?

ABSTRACT

We examine the consequences of a firm’s manager or board members transferring to politics. If social ties with ex-employers can withstand the test of time, the new political powers of former managers and board members would benefit their past companies. If not, these transfers mean losing well-connected and valuable employees, which is detrimental to the concerned companies. Using a new dataset covering listed firms in 11 Central European economies during 2008–2019, we find evidence supporting the latter supposition. Specifically, transfers to politics lower debt dynamics and slow down investment.

KEYWORDS:

• Former managers and board members
• political connections
• social ties
• transfer to politics

JEL CLASSIFICATION:

• G30
• H80

Acknowledgments

The authors acknowledge the financial support from the National Science Center (Poland) under Grant No. UMO-2018/31/B/HS4/00733, entitled “Powiązania polityczne. Wartość dla przedsiębiorstw i znaczenie ogólnogospodarcze. Perspektywa międzynarodowa.”

Disclosure Statement

No potential conflict of interest was reported by the author (s).

Notes

1. Gehlbach et al. (2010), Neumeier (2018), and Adams, Lascher, and Martin (2020) also analyze transfers from business to politics. However, they are interested mainly in motives behind the decisions to start political careers, the performance of ex-businessman as politicians, and electoral chances of business people, respectively.

2. The results do not change when we exclude the largest economy, Poland, from the sample and run regression models for ten smaller countries jointly. The detailed results of this test are available upon request from the authors.

3. However, in the robustness checks section, we verify the stability of our findings by re-estimating our models with observations covering the entire sample period.

4. The empirical results are not sensitive to replacement of the variable PB.POLIT with the number of former managers and board members active in politics in a given year.

5. As we show in Section V, the main conclusions are not sensitive to the choice of the estimation method.

6. For the sake of brevity, we interpret the results obtained for the firm-level control variables only in the case of Table 4. However, those results in the following tables are either quite stable or concordant with expectations.

7. The existing literature on time required to rebuild social ties is inconclusive (see, e.g., Quetulio-Navarra et al. 2012).

8. We cannot use variables NUM.LINKS and PB.POLIT simultaneously because they have zero values in the same places due to the specificity of the phenomenon of TMBPs studied. The same problem concerns variables NUM.LINKS.FUTURE and PB.POLIT.FUTURE.

9. We thank one of the anonymous reviewers for suggesting this test.

10. The empirical outcomes for the remaining dependent variables are available upon request from the authors.

Additional information

Funding

The work was supported by the Narodowe Centrum Nauki [2018/31/B/HS4/00733].

Notes on contributors

Krzysztof Jackowicz

Krzysztof Jackowicz is Professor at the Department of Banking, Insurance and Risk, Kozminski University, Warsaw, Poland. His scientific interests focus on the role of political factors in finance, market discipline in banking, corporate financing, and also the role of cultural dimensions in finance.

Łukasz Kozłowski

Łukasz Kozłowski is Associate Professor at the Department of Banking, Insurance and Risk, Kozminski University, Warsaw, Poland. His research interests concern issues related to the functioning of banks and small and medium-sized enterprises on local markets, financial constraints for small businesses, and the role of cultural dimensions in finance, among others.