Does Democracy Affect Management Practices in Private Firms?

ABSTRACT This study examines the effect of democracy on management practices adopted by private firms. Using the data from 75 countries, we show that firms headquartered in countries with strong democracies have superior management practices compared to firms headquartered in countries with weak democracies. We also conduct several sensitivity tests to provide evidence that the findings are robust. We argue that the presence of effective institutions, informational transparency, and high competition are the main reasons behind the adoption of high‐quality management practices by firms in strong democracies. Furthermore, our findings demonstrate that firm‐ and country‐specific characteristics influence how democracy affects management practices. In conclusion, this study makes a substantial contribution to the literature by establishing a connection between democracy and management practices and indicating a key pathway by which democracy can enhance a nation's economic prosperity.