Political Institutions, Connectedness, and Corporate Risk-Taking
Journal of International Business Studies 2013, 44: 195-215
43 Pages Posted: 12 Jul 2015 Last revised: 13 Jul 2015
Date Written: January 11, 2013
We investigate the impact of political institutions on corporate risk-taking. We posit that the extent of political constraints on the government affect corporate risk-taking along both direct and indirect mechanisms. Using a large sample of non-financial firms from 77 countries covering the period from 1988 to 2008, we find that sound political institutions are positively associated with corporate risk-taking and that this relation is stronger when government extraction is higher. In a sub-sample of 45 countries, we also find that politically-connected firms engage in more risk-taking suggesting that close ties to the government lead to less conservative investment choices. Our results are economically significant and are robust to alternative risk-taking measures, various political institutions proxies, cross-sectional and country-level regressions, and endogeneity concerns of political institutions. Our results have important implications for governments and corporate managers by pointing to the direct relevance of political institutions to the corporate decision-making process. To encourage investment at the firm-level, and hence innovation and overall growth, governments need to undertake the necessary reforms to better control corruption and enforce contracts, and thus decrease government predation and extraction.
Keywords: International Corporate Governance; Political Institutions; Risk Taking Strategies; Political Connections
JEL Classification: G12, G32, G38
Suggested Citation: Suggested Citation