Politically connected boards: the role of country governance, regulated industry, firm size, and institutional ownership

Abstract

Purpose

This study aims to investigate whether country governance, regulated industry and firm-level characteristics, namely, ownership structure and firm size, are associated with the likelihood of firms having a politically connected board (PCB). This study also examines whether country governance and concentrated ownership moderates the association between institutional ownership and PCB.

Design/methodology/approach

This study uses cross-country analysis using 20 countries and hand-collected PCB data from 574 firms and 1,701 firm-year. This study performs logit regression analyses to examine hypotheses.

Findings

The results document that countries’ accountability, industry type and institutional ownership are associated with the likelihood of firms having a PCB. This study also finds that country governance, especially accountability, moderates the relationship between institutional ownership and PCBs. The results thus indicate the importance of country governance, especially accountability, in determining institutional investors’ political strategies.

Practical implications

This study provides several implications. First, firms tend to elect PCBs as a non-financial strategy because it arguably delivers additional resources and improves their performance, especially in countries with lower accountability and regulated industries. Meanwhile, investors and management must also hire PCBs cautiously because PCBs are closely related to agency issues. Agency issues reflect on the finding that institutional investors tend to avoid PCBs. However, the relationship between institutional investors and PCBs is closely related to the country-level context, especially accountability. This study also advises policymakers that country governance, especially accountability, is crucial in regulating the relationship between business and politics.

Originality/value

This study uses a relatively large number of new PCB and institutional ownership data collected manually from 20 countries. This study also examines several variables of country governance, such as accountability to PCB decisions that have not been tested before. This study examines the relationship between institutional ownership and PCB ownership decisions that were not examined before and uses a cross-country sample. In addition, to the best of the authors’ knowledge, this study is the first one that examines the role of state governance, especially accountability for the relationship between institutional ownership and PCBs.

Citation

Murti, A.A.G.K., Utama, S., Hermawan, A.A. and Abbas, Y. (2022), "Politically connected boards: the role of country governance, regulated industry, firm size, and institutional ownership", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-06-2022-0222