Political Connections and Firms’ Diversification

This study examines the relationship between political connections and firms’ diversification. Korean firms have employed government officials and politicians such as general prosecutors and the member of National Assembly after they retired as their outside directors or board of directors for a long time. Despite this trend of firms, little has been studied the effect of political connections and firms’ diversification. We measure political connections as the occurrences of the political or governmental careers of outside directors and board of directors that if a firm has employed an outside director or board of directors that have political or governmental backgrounds at least one for the given year, the firm is classified as a politically connected firm. By considering Korean business environment, we hypothesis that politically connected firms have high level of diversifications of their products because firms that have such people can expand their business scope, and consequentially strengthen their market share. Using a dataset of Korean manufacturing firms over 2010 to 2015, we find that politically connected firms have higher diversification level. The result indicates that political backgrounds of outside directors and board of directors still indirectly affect firms’ expansions over several industries. We contribute the literature by explicitly considering the effect of political connections on firms’ diversification.