Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds

Abstract

Representation on pension fund boards by state officials-often determined by statute decades past-is negatively related to the performance of private equity investments made by the pension fund, despite state officials' relatively strong financial education and experience. Their underperformance appears to be partly driven by poor investment decisions consistent with political expediency, and is also positively related to political contributions from the finance industry. Boards dominated by elected rankand-file plan participants also underperform, but to a smaller extent and due to these trustees' lesser financial experience.HOW DO POLITICIANS AFFECT THE GOVERNANCE of the organizations with which they are associated as board members or fiduciaries? A large literature suggests that political connections can be extremely valuable for firms (Fisman (

The Determinants and Opportunity Costs of External Management Fees for State‐Administered Pension Plans

“…High-profile corruption cases in places like California (Diamond 2016) and New York (Weiser 2016) illustrate the potential for pension fund administrators to violate their fiduciary role, opting instead to pursue their own private interests over pension participants and beneficiaries. The opacity of hedge funds, private equity, and other alternative investments only increases the prospects of private and/or political interests to affect investment decisions (Andonov, Hochberg, and Rauh, 2017;Hess 2005). Indeed, the controversies associated with fund management could represent the "next frontier of public pension litigation" (Anenson 2016: 286).…”

Measuring Institutional Investors’ Skill at Making Private Equity Investments

“…Note that the quartiles are constructed by LP, each of which has a different number of funds in which it invests, so the quartiles have different numbers of funds in them. This analysis is similar to "the value at risk analysis" presented inTable 7ofAndonov, Hochberg, and Rauh (2018).…”

“…As such, this work is related to Lerner, Schoar, and Wongsunwai (2007) and Sensoy, Wang, and Weisbach (2014), who study LPs' investments in private equity funds. This paper is also related to Hochberg and Rauh (2013), Andonov, Hochberg, and Rauh (2018), and Barber, Morse, and Yasuda (2016), who study the investment pressures that LPs face and their impact on performance. However, these papers focus on differences across classes of investors, whereas our focus is on the individual LPs and their choices.…”

“…Both of these practices tend to lower returns. Of the LPs in our sample, public pension funds likely face the greatest such pressures, since there is direct evidence that their boards negatively affect the selection of private equity funds for reasons of political expediency (Andonov, Hochberg, and Rauh (2018)). To evaluate the importance of political pressure in explaining the difference in returns across LPs, we first reestimate our model using a specification that allows for the possibility that public funds, and in particular public pension funds, earn systematically different returns from other investors.…”

“…Within each type, we continue to observe more variation in LP performance than would be expected if LPs had no differential skill. Second, we conduct a test similar to Andonov, Hochberg, and Rauh (2018) and break down the entire distribution of returns by estimated skill level. If LPs with the highest estimated skill are simply taking more risk, they should have the most risky or widest distribution of returns.…”