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 investigate this hypothesis in the context of firm-specific investment, where prior literature has documented a negative relation between investment and uncertainty. Consistent with my hypothesis, I find that political connections (partially) offset the negative effect of political uncertainty on investment, controlling for determinants of investment, general macroeconomic conditions, and industry and time-period fixed effects. My results do not appear to be driven by connected firms pursuing investments that are insensitive to political uncertainty (i.e., highly reversible projects). My second hypothesis predicts and finds that the benefits of targeting political contributions at policymakers with aligned policy preferences produces the greatest benefits for connected firms. Finally, to help rule out the possibility that a correlated omitted variable is driving my primary findings, I perform three additional sets of analyses. First, I identify a setting around a specific 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 find that my results are not sensitive to including additional controls for the determinants of political participation. Relying on determinants of investment and political participation, I also construct a propensity score matched sample and continue to find support for my hypothesis within the matched sample.