Firm-level Political Risk Research Articles

Is firm-level political risk priced in the corporate bond market?

We investigate whether political risk is priced in the cross-section of corporate bond returns by using a text-based measure of firm-level political risk. We document a positive and significant political risk premium after controlling for bond and firm characteristics, conventional risk factors, and exposure to aggregate economic policy uncertainty. Bonds with higher political and credit risk, as well as smaller, more illiquid, and longer maturity corporate bonds exhibit a larger political risk premium. Time-series analysis indicates that monetary policy shocks and common shocks in the equity and bond market exhibit a statistically significant and positive association with the political risk premium. Our findings reveal the importance of idiosyncratic political risk beyond common risk factors and aggregate economic policy uncertainty.

Firm-level political risk and labor performance

This study examines how firm-level political risk relates to labor performance, measured as the ratio of the total of net income and labor cost to the number of employees. Using a sample of 9508 firm-year observations consisting of U.S. firms during the years 2002–2021, we find a significant and negative relation between political risk and labor performance. Our empirical tests show that after controlling for other factors, firms facing a higher level of political risk demonstrate lower labor performance, highlighting the negative impact of political risk on firm behavior and outcomes.

The Impact of Firm-Level Political Risk on ESG Practices: Does CEO Duality Matter?

Although prior studies have probed the determinants of corporate environmental, social, and governance (ESG) performance, limited works have deeply explored the role of firm-level political risk (PRISK) in determining ESG ratings and the moderator role of ownership structure on the PRISK–ESG performance nexus. Thus, this work endeavors to fill the gap by probing the impact of PRISK on aggregate corporate ESG performance and its pillars, namely environmental, social, and governance. In particular, the present study explores whether chief executive officer (CEO) duality has a moderating role between PRISK and ESG performance. Our sample focuses on 350 listed nonfinancial companies operating in the Standard and Poor’s 500 index and performing both Tobit and Poisson panel data estimation methods between 2005 and 2022. Remarkably, we found that PRISK positively affects corporate ESG performance, supporting legitimacy theory. This indicates that a firm with higher political risk exposure prefers to engage more in ESG activities to gain legitimacy, increase its reputation, and achieve corporate success. Furthermore, the findings underscore that an increase in the level of CEO duality leads to a decrease in the positive effect of PRISK on ESG. The findings are robust after considering the various modifications that suggest significant policy implications for corporate executives and policymakers.

Firm-level political risk and corporate investments in the hospitality and tourism industry: The moderating role of asset tangibility and corporate governance quality

Firms in the hospitality and tourism (HT) industry need to continuously make capital investments to sustain their long-term growth. These investments occur under varying conditions, including levels of political risk. Hence, this study examines the effects of firm-level political risk on corporate investments of 251 U.S. HT over the period 2002–2022. It further explores the moderating role of asset tangibility and corporate governance. Using fixed-effect regression analyses, the study finds that firm-level political risk negatively impacts corporate investments in the HT industry. Results reveal that asset tangibility and ownership concentration help mitigate the negative effect of firm-level political risk, while institutional ownership exacerbates this negative effect. Given that corporate investments are the backbone of the sustainable growth of HT firms, this research provides important implications for policymakers and practitioners in their attempts to reduce the negative effect of political risk on corporate investments.

Does firm-level political risk influence earnings management?

Does firm-level political risk influence earnings management?

Firm-level political risk and stock price crashes

In this study, we examine the relationship between firm-level political risk and stock price crash risk. Using a broad dataset of 4230 U.S. firms, 38,097 firm-year observations from 2002 to 2019, we reveal a positive association between political risk and stock price crash risk. These findings are robust to several model specifications and endogeneity checks. By using the Brexit referendum as a quasi-natural experiment, we provide evidence of a causal relationship between political risk and crash risk. Through channel analysis, we identify that this relationship is mediated via higher idiosyncratic volatility, lower price informativeness, and higher distress risk. We also find that our results are more pronounced in intangible-intensive firms. Interestingly, we show that managers of these firms respond to political risk by engaging in bad news hoarding. Finally, strong (external or internal) corporate governance mechanisms can moderate the positive relationship between political risk and stock price crash risk.

Firm-level political risk and the firm’s trade credit extension

This paper investigates the influence of firm-level political risk on the firm’s supply of trade credit. Using a novel measure of firm-level political risk developed by Hassan et al. (2019), we find that firm-level political risk has a positive impact on the firm’s trade credit extension. We also demonstrate that our results are not driven by macro financial and political events, firm-level political sentiment and non-political risks, and macro-level economic and political factors. Our result continues to hold after addressing the potential endogeneity concern. Additionally, we find that the positive impact of political risk on trade credit extension is more pronounced for firms selling differentiated goods and services. Furthermore, we demonstrate that extending trade credit enhances firm value when a firm faces higher political risk. This paper highlights the importance of considering firm-level heterogeneity in political risk. It also contributes to the literature on the determinants of trade credit extension and deepens our understanding of the relationship between political risk, trade credit, and corporate performance.

Portfolio's weighted political risk and mutual fund performance: A text-based approach

Using text-based measures of firm-level political risk, we find a negative impact of the portfolio's weighted political risk on U.S. mutual fund performance. This relationship is robust to a wide range of topic-specific political risks at the firm level. We, however, find that national geopolitical risk, the U.S. state-level economic policy uncertainty, and Brexit-induced risk do not affect mutual fund performance. Our results suggest that even though mutual funds are immune from political risk at the macro level, they are significantly exposed to idiosyncratic political risk. We also demonstrate that partisanship matters to mutual fund performance.

Firm-level political risk and corporate R&D investment

We examine firms’ investment decisions in research and development during political uncertainty using US firm quarterly data from 2005 through 2021. By using quarterly data, we minimize stickiness and overly generalized assumptions. The findings show that firms invest more in research and development in times of high political risk. Monetarily, the significance translates to about $10.6 million injection into research and development. The results are more pronounced for firms in competitive industries, politically sensitive firms, firms with higher growth opportunities, and firms with more liquid assets. The results are robust to the test for correlation, addressing endogeneity, and alternative proxies adopted for the variables of interest. Overall, the findings of this study support the strategic growth option theory, which suggests that firms follow a preemptive strategy in periods of high uncertainty.

The Impact of Political Risks on Financial Markets: Evidence from a Stock Price Crash Perspective

Political risk, one of the most significant uncertainty shocks, affects firms’ future attitudes toward risks and plays a crucial role in their decision making. A stock price crash risk is a classical topic in financial markets; therefore, this paper probes the relationship between firm-level political risk and stock price crash risk based on a sample of Chinese listed firms from 2011 to 2020. This paper collects the MD&A textual material of Chinese listed firms and calculates the firm-level political risk of Chinese listed firms. Our results show that a firm’s stock price crash risk is positively associated with its firm-level political risk exposure. Our findings hold after conducting various robustness tests, including instrument variable regression and altering the measurement of stock price crash risk. Further discussion reveals that political involvement mitigates the positive effect of firm-level political risk on the risk of a stock price jump.

Dance with wolves: firm-level political risk and mergers and acquisitions

Dance with wolves: firm-level political risk and mergers and acquisitions

Connected to risk: CEOs’ hometown connections and firm-level political risk in China

ABSTRACT This paper investigates the nexus between CEOs’ hometown connections and firm-level political risk by employing a sample of Chinese listed firms from 2011 to 2020. Our findings show that CEOs’ hometown connections mitigate firm-level political risk. The above finding remains valid after ruling out the explanation of the firm’s local embeddedness and conducting IV regression estimation. Then, we further discuss the potential interaction effect of CEO age and CEO duality. Therefore, we deepen the understanding of the advantage of CEOs’ hometown connections and show a plausible mitigating factor of the political risk faced by firms.

Firm-Level Political Risk and the Cash Flow Sensitivity of Cash

We examine the impact of firm-level political risk on the cash flow sensitivity of cash. Using a large sample of U.S. firms from 2003 to 2018, we find that the cash flow sensitivity of cash decreases in political uncertainty and the impact of political risk is asymmetric to cash flow types (positive versus negative). Intensified political uncertainty induces positive/negative cash flow firms to reduce savings out of cash flows to finance investment opportunities/terminate unprofitable projects to retrieve cash. The results are robust to various model specifications, alternative variable definitions, and the control for non-political risks. In addition, we show that a firm’s financial status moderates the relation between the two, with financially constrained positive/negative cash flow firms saving more out of cash flows/decreasing existing savings as firm-level political risk increases.

Firm-level political risk and equity issuance

We examine whether firm-level political risk influences the issuance of equity (debt) to finance corporate investment. With a sample of 64,693 firm-quarter observations from 2002 to 2020, we find that firm-level political risk is significantly and positively associated with subsequent equity issuance as opposed to debt issuance. To mitigate endogeneity, we estimate firm fixed-effects regression, perform nearest-neighbor score matching technique and Heckman’s (1979) two-step correction procedure, and employ gubernatorial elections in different states of the U.S. as a shock to the firm-level political risk. We also test for two potential economic mechanisms, financial flexibility and information asymmetry, and find that our baseline results are more pronounced for these channels. Our study presents new evidence on firms’ financing choices in the presence of firm-level political risk.

Is Firm-level Political Risk Priced in the Corporate Bond Market?

Is Firm-level Political Risk Priced in the Corporate Bond Market?

Firm-level political risk and intellectual capital investment: Does managerial ability matter?

This paper examines the impacts of firm-level political risks on intellectual capital investment decisions and how managerial ability adjusts this relationship. Using a broad sample of U.S firms from 2002 to 2021, our results show that firms with higher political risks reduce their investment in intellectual capital. This impact is more prominent for high-tech firms and firms with high financial distress, external financial dependence, and lower institutional ownership. Further, we find supportive evidence that managerial ability can prevent a substantial dimension (around 20%–40%) of the destructive impact of political risk on intellectual capital investment, which is also driven by firm-specific characteristics. These findings hold after a battery of robustness tests.

Is Firm-Level Political Risk Priced in the Equity Option Market?

Abstract We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints, and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms are compensated with high returns when major unexpected political shocks happen. (JEL G13, G18)

Firm-level political risk and credit markets

We take advantage of a new composite measure of political risk (Hassan et al., 2019) to study the effects of firm-level political risk on private debt markets. First, we use panel data tests and exploit the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that borrowers’ political risk is linked to interest rates set by lenders. Second, we test for the transmission of political risk from lenders to borrowers. We predict and find that lender-level political risk propagates to borrowers through lending relationships. Our analysis allows for endogenous matching between lenders and borrowers and indicates the presence of network effects in diffusing political risk throughout the economy. Finally, we introduce new text-based methods to analyze the distinct sources of political risk to lenders and borrowers and provide textual evidence of the transmission of political risk from lenders to borrowers.

Firm-level political risk and external financing choices

This study investigates the association between firm-level political risk and external financing choices. We find that firm-level political risk is positively related to net equity issuance but is insignificantly associated with net debt issuance. The evidence shows that precautionary savings, market timing, and internal financial constraints could explain the positive relation between firm-level political risk and net equity issuance. Overall, our findings suggest that firms exposed to higher political risk issue more equity than debt as a source of external financing.

Firm-level political risk and earnings opacity

Given the recent growing global uncertainties, firms have encountered increasing political risks and responded accordingly to avoid a negative impact on their performance. This study examines the impact of firm-level political risk on corporate earnings opacity among listed U.S. firms. Our empirical results reveal that higher firm-level political risk engenders greater corporate earnings opacity via three channels of market scrutiny, political proximity, and multiple business objectives. Further analyses show that politically risky firms are more prudent in earnings management when they are highly dependent on government spending. The results hold after a wide range of robustness tests. Our findings provide several implications for the management of earnings quality in response to increasing firm-level political risk in the U.S.