Polarized Corporate Boards
By Phong Ngo | Posted on 16 July 2021
Post type: Paper
We show that political polarization between directors and the CEO negatively impacts the effectiveness of corporate boards. At the director level, polarization increases directors’ incentive to monitor the CEO but creates a hostile board environment and discourages moderate directors’ board meeting attendance. This leads to compromised board capacity at the firm level and significantly reduces the forced turnover-performance sensitivity. Our results are more pronounced in Presidential election years and for firms with more monitoring and advising needs. Finally, we show that polarization in the boardroom lowers the investment-Q sensitivity. Our findings highlight the real economic cost of political polarization.
Co-Author(s): Thao Hoang and Le Zhang