Skip to main content
SpringerLink
Log in

CEO’s Political Connection and Organization Efficiency: Evidence from Public Institutions in Korea

  • Published:
Public Organization Review Aims and scope Submit manuscript

Abstract

This paper investigates whether political connection of Chief Executive Officer (CEO) in public institutions is associated with organization efficiency. We utilize two types of public institutions in Korea, state-owned enterprises (SOEs) and quasi-governmental organizations (QUANGOs). Using the Data Envelopment Analysis (DEA), we find that CEOs with political connection are positively related to organization efficiency. Specifically, such association is largely driven by QUANGOs whose revenue resource is fully funded and owned by the government. It implies that politically connected CEOs can improve firm efficiency when the organizations are financially dependent on the government and are under its stringent monitoring by government.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. We use the term “public institutions” throughout this paper to indicate organizations providing public services that are (partially or fully) owned by the government.

  2. Demerjian et al. (2012) include the following seven input variables: property, plant, and equipment (PPE), operating lease, intangible assets such as R&D or goodwill, and operating expenses of cost of goods sold, and SG&A. Considering that their research sample is consists of private companies, the specific input variables we include in our model are different from theirs. However, we try to incorporate the factors to affect firm efficiency based on the literature about public organizations.

  3. The measurement of firm efficiency using the DEA optimization procedure can be summarized in three steps. First, the weights on inputs and outputs are varied such that the ratio of outputs to inputs is maximized for samples sorted out into groups by year. The weights are assigned such that each observation’s weight is maximized with respect to other observations in the same year. The resulting weights are firm-specific. Second, to calculate the ratio-based efficiency scores for each firm, we sum the values obtained by multiplying output and input quantities by the estimated optimal weights derived in the first step. Third, all efficiency scores are scaled by the highest efficiency score within the group, resulting in an ordinal sorting of firms on relative efficiency; the most efficient firm has a value of 1 (Baghdadi et al. 2018).

  4. The interest conflicts between the government and shareholders in SOEs are easily observed. For example, in 2019, Korea Electric Power Corporation (KEPCO) was pressured by the government to restructure its electricity charge system toward lowering rates. However, KEPCO’s board of directors did not accept the revised charge system because the revision would damage its financial status, even though eventually they accepted the revision.

References

  • Aberbach, J. D., Putman, R. D., & Rockman, B. A. (1981). Bureaucrats and politicians in western democracies. Cambridge: Harvard University Press.

    Book  Google Scholar 

  • Baghdadi, G. A., Bhatti, I. M., Nguyen, L. H. G., & Podolski, E. J. (2018). Skill or effort? Institutional ownership and managerial efficiency. Journal of Banking and Finance, 91, 19–33.

    Article  Google Scholar 

  • Bertelli, A. M. (2006). Delegating to the Quango: Ex ante and ex post ministerial constraints. Governance, 19(2), 229–249.

    Article  Google Scholar 

  • Boeker, W., & Goodstein, J. (1991). Organizational performance and adaptation: Effects of environment and performance on changes in board composition. Academy of Management Journal, 34(4), 805–826.

    Article  Google Scholar 

  • Chen, S., Sun, A., Tang, S., & Wu, D. (2011). Government intervention and investment efficiency: Evidence from China. Journal of Corporate Finance, 17(2), 259–271.

    Article  Google Scholar 

  • Cho, T., & Song, S. H. (2010). The effect of the management performance evaluation system on management efficiencies of quasi-governmental agencies. Korean Governance Review, 17(3), 85–107.

    Article  Google Scholar 

  • Claessens, S., Feijen, E., & Laeven, L. (2008). Political connections and preferential access to finance: The role of campaign contributions. Journal of Financial Economics, 88(3), 554–580.

    Article  Google Scholar 

  • Cornaggia, K. J., Krishnan, G. V., & Wang, C. (2017). Managerial ability and credit ratings. Contemporary Accounting Research, 34(4), 2094–2122.

    Article  Google Scholar 

  • Cuervo-Cazurra, A., Inkpen, A., Musacchio, A., & Ramaswamy, K. (2014). Governments as owners: Sate-owned multinational companies. Journal of International Business Studies, 45(8), 919–942.

    Article  Google Scholar 

  • Demerjian, P. R., Lev, B., & McVay, S. (2012). Quantifying managerial ability: A new measure and validity tests. Management Science, 58(7), 1229–1248.

    Article  Google Scholar 

  • Demerjian, P. R., Lev, B., Lewis, M., & McVay, S. (2013). Managerial ability and earnings quality. Accounting Review, 88(2), 463–498.

    Article  Google Scholar 

  • Dew, N., Velamui, S. R., & Venkataraman, S. (2004). Dispersed knowledge and an entrepreneurial theory of the firm. Journal of Business Venturing, 19(5), 659–679.

    Article  Google Scholar 

  • Ding, S., Jia, C., Wu, Z., & Zhang, X. (2014). Executive political connections and firm performance: Comparative evidence from privately-controlled and state-owned enterprises. International Review of Financial Analysis, 36, 153–167.

    Article  Google Scholar 

  • Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57–74.

    Article  Google Scholar 

  • Faccio, M. (2006). Politically connected firms. American Economic Review, 96(1), 369–386.

    Article  Google Scholar 

  • Faccio, M., Masulis, R. W., & McConnell, J. J. (2006). Political connections and corporate bailouts. Journal of Finance, 61(6), 2597–2635.

    Article  Google Scholar 

  • Fan, J. P. H., Wang, T. J., & Zhang, T. (2007). Politically connected CEOs, corporate governance, and post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84(2), 330–357.

    Article  Google Scholar 

  • Flinders, M. V., & Smith, M. (1998). Quangos, accountability and reform: The politics of quasi-government. New York: St. Martin’s Press.

    Google Scholar 

  • Francis, J., LaFond, R., Olsson, P. M., & Schipper, K. (2004). Costs of equality and earnings attributes. The Accounting Review, 79(4), 967–1010.

    Article  Google Scholar 

  • Freund, E. M. (2001). Fizz, froth, flat: The challenge of converting China’s SOE’s into shareholding corporations. Policy Studies Review, 18(1), 96–111.

    Article  Google Scholar 

  • Gruening, G. (2001). Origin and theories basis of new public management. International Public Management Journal, 4(1), 1–25.

    Article  Google Scholar 

  • Hillman, A. J. (2005). Politicians on the board of directors: Do connections affect the bottom line? Journal of Management, 31(3), 464–481.

    Article  Google Scholar 

  • Hong, J., & Park, K. (2016). A study on impact of privatization: Focus on efficiency and productivity. Journal of the Korea Academy-Industrial Cooperation Society, 17(3), 298–309.

    Article  Google Scholar 

  • Horn, M. (1995). The political economy of public administration: Institutional choice in the public sector. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Jung, J.-S., & Han, S.-H. (2014). The background of the head of the state-run agency on innovation and performance. Korean Society and Administrative Research, 25(1), 116–140.

    Google Scholar 

  • Khanna, T., & Palepu, K. (2000). The future of business groups in emerging markets: Long-run evidence from Chile. Academy of Management Journal, 43(3), 268–285.

    Article  Google Scholar 

  • Kim, H. (2015). Efficiency rating by types of public institutions and identification of inefficiency sources. Journal of Korean Operations Research and Management Science Society, 40(1), 75–89.

    Google Scholar 

  • Kim, D. (2017). A study on the effect of governmental grants to the efficiency of public agencies. (Doctoral dissertation, Seoul National University, Republic of Korea).

  • Kim, S., & Lee, H. (2015). Characteristics of corporate governance and operating efficiency in public enterprises. Korean Accounting Review, 21(3), 231–267.

    Article  Google Scholar 

  • Lazzarini, S. G. (2015). Strategizing by the government: Can industry policy create firm-level competitive advantage? Strategic Management Journal, 36(1), 97–112.

    Article  Google Scholar 

  • Li, H., Meng, L., Wang, Q., & Zhou, L. A. (2008). Political connections, financing and firm performance: Evidence from Chinese private firms. Journal of Development Economics, 87(2), 283–299.

    Article  Google Scholar 

  • Megginson, W. L., & Netter, J. M. (2001). From state to market: A survey of empirical studies on privatization. Journal of Economic Literature, 39(2), 321–389.

    Article  Google Scholar 

  • Ministry of Economy and Finance (2018). All public information in all for public institutions in Korea Retrieved from https://www.alio.go.kr/aliopresent.do# Accessed 20 Apr 2019.

  • Moynihan, D. P., & Pandey, S. K. (2005). Testing a model of public sector performance: How does management matter. Journal of Public Administration Research and Theory, 15(3), 4221–4439.

    Google Scholar 

  • Musacchio, A., Lazzarini, S. G., & Aguilera, R. V. (2015). New varieties of state capitalism: Strategic and governance implications. Academy of Management Perspective, 29(1), 115–131.

    Article  Google Scholar 

  • Park, S. (2013). What causes the death of public sector organizations: Understanding structural changes and continuities in Korean Quangos. International Public Management Journal, 16(3), 413–437.

    Article  Google Scholar 

  • Peng, M. W., Sun, S. L., Pinkhanm, B., & Chen, H. (2009). The institution based view as a third leg for a strategy tripod. Academy of Management Perspective, 23(3), 63–81.

    Article  Google Scholar 

  • Petkevich, A., & Prevost, A. (2018). Managerial ability, information quality, and the design and pricing of corporate debt. Review of Quantitative Finance and Accounting, 51(4), 1033–1069.

    Article  Google Scholar 

  • Rainey, H. G., & Steinbauer, P. (1999). Galloping elephants: Developing elements of a theory of effective government organizations. Journal of Public Administration Research and Theory, 9(1), 1–32.

    Article  Google Scholar 

  • Ramamurti, R. (2000). A multilevel model of privatization in emerging economies. The Academy of Management Review, 25(3), 525–550.

    Article  Google Scholar 

  • Robins, F. (2013). The uniqueness of Chinese outward foreign direct investment. Asian Business & Management, 12(5), 525–537.

    Article  Google Scholar 

  • Shelifer, A. (1998). State versus private ownership. Journal of Economic Perspectives, 12(4), 133–150.

    Article  Google Scholar 

  • Shelifer, A., & Vishny, R. W. (1994). Politicians and firms. Quarterly Journal of Economics, 109(4), 995–1025.

    Article  Google Scholar 

  • Sun, Q., Tong, W. H., & Tong, J. (2002). How does government ownership affect firm performance? Evidence from China’s privatization experience. Journal of Banking, Finance, and Accounting, 29(1), 1–27.

    Google Scholar 

  • The Korea Times (2018). Parachute appointment. Retrieved from https://www.koreatimes.co.kr/www/opinion/2018/09/202_255270.html. Accessed 24 Apr 2020.

  • Van Thiel, S. (2004). Trends in the public sector. Journal of Theoretical Politics, 16(2), 175–201.

    Article  Google Scholar 

  • Wang, Z., Chen, M.-H., Chin, C. L., & Zheng, Q. (2017). Managerial ability, political connections, and fraudulent financial reporting in China. Journal of Accounting and Public Policy, 36(2), 141–162.

    Article  Google Scholar 

  • Wu, W., Wu, C., & Rui, O. M. (2012). Ownership and the value of political connections: Evidence from China. European Financial Management, 18(4), 695–729.

    Article  Google Scholar 

  • Yoo, S.-W. (2013). CEO’s political independence, board chair separation, executive’s expertise, and performance in state-owned enterprises. Korean Development Research, 35(2), 1–39.

    Google Scholar 

  • Yung, K., & Chen, C. (2018). Managerial ability and firm risk-taking behavior. Review of Quantitative Finance and Accounting, 51(4), 1005–1032.

    Article  Google Scholar 

  • Zhao, X., Wan, D., & Xu, H. (2013). Political connections and the efficiency of capital allocation through bond financing in Chinese listed companies. Emerging Markets Finance and Trade, 49(sup2), 158–170.

    Article  Google Scholar 

  • Zhou, K. Z., Gao, G. Y., & Zhao, H. (2017). State ownership and firm innovation in China: An integrated view of institutional and efficiency logics. Administrative Science Quarterly, 62(2), 375–404.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Business Administration, Pusan National University, 2, Busandaehak-ro 63beon-gil, Geumjeong-gu, Busan, 46241, South Korea

    Hyejeong Shin

  2. Ewha Womans University, 52 Ewhayeodae-gil, Seodaemun-gu, Seoul, 03760, South Korea

    Ji-Young Ahn

Authors
  1. Hyejeong Shin
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ji-Young Ahn
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ji-Young Ahn.

Ethics declarations

Conflict of Interest

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Informed Consent

None.

Ethical Approval

None.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Shin, H., Ahn, JY. CEO’s Political Connection and Organization Efficiency: Evidence from Public Institutions in Korea. Public Organiz Rev 21, 419–435 (2021). https://doi.org/10.1007/s11115-020-00497-y

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11115-020-00497-y

Keywords

Search

Navigation