Better Safe than Sorry: Financial Activism and the Deterrence Effect of Democratic Politician Shareholders

Strategy & Business Policy

Speaker: Timothy Werner

Professor - UT Austin

Conference  Jouy-en-Josas T017

Abstract

Firms strategically establish political connections in the hopes of obtaining access to resources and opportunities controlled by the state. However, little is known about the incidental political ties that accrue to firms in the form of politician shareholders. We explore the possibility that such ties provide firms spillover benefits in the context of financial activism. Specifically, we examine whether ownership by Democratic politicians, who, on average, are more interventionist and stakeholder-oriented when it comes to economic regulation than Republicans, deters financial activists from targeting firms. Building on research showing the controversial consequences of financial activism, we argue that financial activists will refrain from targeting firms owned by Democratic politicians to avoid potential conflicts with such politicians. Based upon an analysis of S&P 1500 constituents over 15 years, we find that the number of Democratic politician shareholders in a firm reduces the firm’s likelihood of being targeted by a financial activist. We find this relationship is stronger when the Democratic politician shareholders are more publicly prominent and when firms have more liberal-leaning boards. Moreover, politically active financial activists, instead of politically inactive financial activists, are deterred from targeting firms with Democratic politician shareholders. Our study shows that the benefits politician shareholders provide to firms spill over beyond the business-government interface and into the domain of corporate governance.