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Policy uncertainty, political capital, and firm risk-taking

Subject

Finance

Publishing details

Authors / Editors

Akey P;Lewellen S

Publication Year

2017

Abstract

We link the cross-section of firms' sensitivities to economic policy uncertainty to their subsequent political activity and post-election risk-taking and performance. We first show that firms with a high sensitivity to economic policy uncertainty donate more to candidates for elected office than less-sensitive firms. Using a sample of close U.S. congressional elections, we then show that plausibly exogenous positive shocks to policy-sensitive firms' political capital bases produce large subsequent changes in these firms' investment, leverage, firm value, operating performance, CDS spreads, and option-implied volatility. We do not find similar effects among less policy-sensitive firms, suggesting that many existing results in the political capital literature appear to be driven by policy-sensitive firms. We also examine the term structure of credit risk and implied volatility following political capital shocks and find that these shocks are expected to be long-lasting in nature. Our results highlight a new potential motivation behind firms' accumulation of political capital and represent the first attempt in the literature to shed light on the relationship between firms' policy sensitivities and their subsequent risk-taking and performance following political elections.

Series

Working Paper

Available on ECCH

No


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