The Interplay of Political Ties and Ownership Structure in Emerging Markets: A Signaling View

• Main Authors: Federo, Ryan, Galang, Roberto Martin N, Lizares, Regina
• Format: text
• Published: Archīum Ateneo 2024
• Subjects: Business; Business Administration, Management, and Operations; Leadership
• Online Access: https://archium.ateneo.edu/leadership-and-strategy-faculty-pubs/45; https://doi.org/10.5465/AMPROC.2024.10258abstract
• Institution: Ateneo De Manila University

Many firms establish political ties by appointing politically connected directors to operate effectively in emerging markets. However, the extant corporate socio-political engagement literature offers inconclusive findings regarding the link between political ties and firm outcomes. Our study posits that in emerging markets with weak state capacities, politically connected directors can be construed as signals to generate legitimacy and positive stakeholder reputation. Drawing on signaling theory, we argue that political connection on the board is associated with higher firm value and ESG ratings. We also claim that these relationships are contingent on firm ownership structures, which enhance the politically connected directors’ signaling effect on firm outcomes. Our analyses on Philippine publicly listed corporations show that the presence of politically connected directors is positively associated with enterprise value and ESG scores. Moreover, we find that the positive association between political connection on the board and enterprise value is stronger in firms affiliated with business groups than non-affiliated ones, whereas the positive link of politically connected directors to ESG score is more pronounced in firms with dispersed than concentrated ownership. We discuss our study’s implication on management research and practice.