Politicians and corporate boards
Gulla, Darrin Vincent
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Corporate boards of directors serve an important function in monitoring management and reducing agency costs. However, some directors have backgrounds that seem to offer little to this end. Former politicians, in particular, fall into this category. The logical explanation for the appearance of such directors is to assist rent-seeking activities rather than to participate in managerial oversight. Though this approach is intuitive, it fails to capture the full range of public choice theories. It is possible that these politically experienced directors obtain their positions through a rent extraction process. The determinants of board political composition are estimated using a probit regression. The impact on firm value from the appointment of a politically experienced director is analyzed using event study procedures. The effectiveness of politically experienced directors in monitoring management is also examined.