Mitigating political uncertainty

Abstract

This study examines whether firms that establish political connections gain differential access to relevant information over legislative developments, thereby mitigating the negative consequences of uncertainty. I find that political connections (partially) offset the negative relation between investment and political uncertainty documented in prior research. My results do not appear to be driven by connected firms pursuing investments that are insensitive to uncertainty. I perform additional tests to address concerns over correlated omitted variables. First, I identify a setting around a tax policy development designed to provide new investment incentives to firms. In this setting, I predict and find that reduced information asymmetry for connected firms results in delaying investment in anticipation of future lucrative tax incentives. Second, I perform a falsification test and document that political connections do not mitigate the effects of general economic uncertainty. Finally, I continue to find support for my hypothesis within a propensity matched sample.