Political Relations and Finance

Abstract

This thesis consists of three studies that investigate how important political relations are in finance.

In the first study, I find that poor bilateral political relations between the US and other countries negatively influence US media dissemination toward non-US firms with American Depositary Receipts (ADRs). I also show that US media negativity has downward pressure on ADR firms’ home market prices and such negative impact is reduced during the year when political relations are poor—an indication that investors react to real media bias. I conclude the first study by showing that negative US media coverage leads to a higher likelihood of ADR firms terminating their ADRs.

The second study finds strong empirical evidence showing that when bilateral political relations between a country and the US are poor, the level of US institutional ownership and the number of institutional investors are low for American Depositary Receipt (ADR) firms from that country. In addition, the second study discusses whether a country’s popularity among Americans and an international crisis influence the level of US institutional ownership. Furthermore, following the previous literature, I show empirically that a high level of US institutional ownership promotes better corporate governance; to do so, I look at firm value, class action lawsuits and voluntary disclosure news.

The third study considers whether bilateral political relations affect the board structure of S&P 1500 companies—specifically the proportion of foreign independent directors (FIDs). I find strong empirical evidence that when bilateral political relations between a country and the US are poor, the proportion of FIDs from that country hired by US firms is small. The threat of a firm losing technology and insider information to countries with poor political relations are considered costs by US firms, so when firms do hire FIDs from countries that have poor political relations with the US, I empirically show that the benefits are greater than the costs. I conclude the third study with an M&A analysis, which finds that firms have a high proportion of FIDs from countries where their acquisition targets exist and bilateral political relations do not influence such a proportion.