Firm-level political risk and corporate innovation: evidence from US listed firms

Abstract

PurposeThe study examines the association between firm-level political risk and corporate innovation and also this study explores how financial constraint and growth level of a firm influence this association.Design/methodology/approach A sample of 14,140 firm-year observations of the US firms from 2003 to 2020 is used. Unlike prior studies, this study uses a firm-level measure of political risk recently developed by Hassan et al. (2019) and measure innovation by patent and patent citation data and a text-based measure. A regression technique is used for empirical testing.FindingsThis study finds that firm-level political risk is negatively associated with innovation and also document that firm-level political risk has a negative impact on innovation for financially constrained and high growth firms. The overall results are robust after addressing the issue of potential endogeneity using entropy balancing and two-stage least squares regression techniques. This study also documents qualitatively consistent results after using alternative measures of innovation as well as firm-level political uncertainty.Research limitations/implicationsThe findings of this study could help the managers to make better investment decision and improve economic efficiency through understanding the effect of firm-level political risk on innovation activities.Originality/valueThe study concentrates on firm-level political risk and innovation and presents new insights that political risk at the microlevel is an important determinant for investment in innovative activities.