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Sleeping with the enemy: The perils of having the government on(the)board

Santiago Barraza, Martín Rossi and Christian Ruzzier ()

Journal of Comparative Economics, 2022, vol. 50, issue 3, 641-651

Abstract: We study the causal effect of unsought political connections on firm value. To address concerns of potential endogeneity and sample-selection bias we exploit the nationalization of Argentina's pension system, a unique natural experiment yielding exogenous variation in new political connections. We find unsought political connections to have a large negative effect on the value of newly connected firms. Yet this result only materializes when, in addition to becoming a shareholder, the government also obtains the right to appoint directors. Decreased stock liquidity or higher stock volatility do not explain this result, suggesting a channel that decreases expected cash flows to shareholders.

Keywords: Political connections; Corporate governance; Grabbing hand; Firm value; Government ownership (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jce.2022.01.005

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