Politically Connected Directors and Corporate Governance

Abstract

Research has shown that firms can benefit when they are politically connected. The extant literature has shown that politically connected firms benefit from procurement contracts, reduced regulatory issues and lower costs of capital. However, with more politicians joining corporate boards, the effect of political connectedness on corporate governance remains unclear. This paper examines the association between politically connected directors and corporate governance. A sample of high ranking politicians that have joined firm boards of directors is examined. I find that firms with politician directors have higher corporate governance scores. Additional tests also indicate that an addition of a politician to a board of directors increases the governance quality.