Political cycle in the market for corporate director

Abstract

In this paper, we explore the relationship between CEO’s political preference and post-retirement directorship holding by individual CEOs. We test a hypothesis that CEO’s political preference might be a signal for (potential) political network in the professional labor market. We use a data set on the political donations of CEOs to major political parties from 2003-2014 in the U.S. Firstly, we provide direct evidences that one of main candidates in the market for corporate directors is a retired CEO. The proportion of retired CEO outside directors for all outside directors in the S&P 500 firms is 20.62%. Second, our empirical evidence suggests that the political donations of CEOs are more likely to reveal a preference, not strategic behavior. 72.8% of CEOs do not change the pattern of donation according to the ruling party. 73.7% of CEOs do not change donation behavior before vs. after CEO retirement, either. Third, the success in the market for corporate director depends on the ruling party. Republican partisan CEOs hold larger outside directorships than Democratic partisan CEOs only under a Republican regime. These regressions results are robust for controlling the endogeneity problem. We use the presidential election result at a state where a headquarter of CEO firm is located as the instrumental variable. Fourthly, Democratic CEOs have more variations on outside directorships across political regimes. Democratic CEOs hold 0.77 directorships two years after retirement and 0.70 directorships three years after retirement under a Democratic regime, which are statistically larger than 0.54 and 0.51 under a Republican regime. However, Republican CEOs hold stable outside directorships across different ruling parties. Finally, the political cycle in the market for corporate director could be partially explained by the connection value in the regulated industry, but the regulated industry does not fully drive our main outcomes.