Policy Uncertainty, Political Capital, and Firm Risk-Taking
61 Pages Posted: 5 Apr 2016 Last revised: 22 Mar 2017
Date Written: March 22, 2017
We document a new "policy sensitivity" channel of corporate political contributions. Firms that are highly sensitive to government policy uncertainty have a stronger incentive to contribute to political candidates, and these firms' risk-taking and performance should be more affected by the gain or loss of a political connection relative to less-sensitive firms. We verify these patterns in the data using a sample of close U.S. congressional elections. We first show that policy-sensitive firms donate more to candidates for elected office than less-sensitive firms. We then show that plausibly exogenous shocks to policy-sensitive firms' political connections produce larger subsequent changes in these firms' investment, leverage, firm value, operating performance, CDS spreads, and option-implied volatility relative to less-sensitive firms. Our results represent the first attempt in the literature to disentangle the effects of policy sensitivity and political connectedness on firms' risk-taking and performance and suggest that many existing results in the political connections literature are driven by policy-sensitive firms.
Keywords: Political Connections, Economic Policy Uncertainty, Corporate Finance, Investment, Credit Default Swaps, Implied Volatility
JEL Classification: D72, G12, G18, G31, G38
Suggested Citation: Suggested Citation