Board Composition and Performance of State-owned Enterprises: Quasi-experimental Evidence

Abstract

The quality of governance crucially affects corporate outcomes, and may be particularly important for state-owned enterprises (SOEs) not disciplined by market competition forces. We examine the impact of board composition on the performance of companies controlled by public entities in Italy. For this purpose, we exploit a reform-induced exogenous change in board composition, aimed at increasing female representation and at reducing the revolving-door phenomenon. The law's provisions were binding for SOEs, but not for companies with a minority share of public ownership, allowing us to adopt a difference-in-differences estimation. The results show that female presence on the boards of directors of SOEs has increased, while that of former politicians has decreased. The new directors have mostly replaced older and less talented men, thereby rejuvenating the boards and improving their quality. To assess the effects of the board shake-up on firm performance, we analyse companies' balance sheets and survey information on citizens' satisfaction with the provision of local public services and on objective measures of their quality. While we detect no significant effects on firm productivity, we find that profitability increases and leverage decreases, thereby reducing corporate credit risk. Finally, there is evidence consistent with an improvement in the quality of SOEs' output.