Firm-level political risk and corporate investment

Abstract

• We examine firm-level activities and characteristics that mitigate the impact of political risk on firm investment. • Firms with higher political exposure and political risk spend less on capital investment. • Political lobbying effectively reduces the negative impact of political exposure and political risk on corporate investment. • The negative relationship between firm-level political risk and corporate investment is affected by certain firm activities and characteristics. Extant literature shows that firms reduce their capital investment in response to political risk. We examine firm-level activities and characteristics that mitigate the impact of political risk on firm investment. First, we empirically investigate the relationship between firm-level political risk and future investment, showing that firms with higher political exposure and political risk spend less on capital investment. Next, we examine the mechanisms behind the negative relationship between firm-level political risk and corporate investment. We find that political lobbying effectively reduces the negative impact of political exposure and political risk on corporate investment. In addition to corroborating the key findings documented in the literature that firms react to political risk by cutting investment, we show that this relationship is affected by certain firm activities and characteristics.