The Effect of Political Risk on Shareholder Value and the Mitigating Role of Corporate Social Responsibility (CSR)

Abstract

We investigate the effect of political risk on shareholder value, using an event study and a novel measure of firm-level political risk recently developed by Hassan et al. (2019). We exploit the guilty plea of Jack Abramoff, a well-known lobbyist, on January 3, 2006, as an exogenous shock that made lobbying less effective and less useful in the future, depriving firms of an important tool to reduce political exposure. Our results show that the market reactions are significantly more negative for firms with more political exposure. Additional analysis corroborates the results, including propensity score matching, instrumental-variable analysis, and Oster’s (2019) method for testing coefficient stability. Finally, we find that the adverse effect of political risk on shareholder value is substantially mitigated for firms with strong social responsibility, consistent with the risk mitigation hypothesis.