Policy Uncertainty, Political Capital, and Firm Risk-Taking

61 Pages Posted: 5 Apr 2016 Last revised: 22 Mar 2017

Pat Akey

University of Toronto - Rotman School of Management

Stefan Lewellen

London Business School

Date Written: March 22, 2017

Abstract

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

Akey, Pat and Lewellen, Stefan, Policy Uncertainty, Political Capital, and Firm Risk-Taking (March 22, 2017). Available at SSRN: https://ssrn.com/abstract=2758395 or http://dx.doi.org/10.2139/ssrn.2758395

Pat Akey (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Stefan M. Lewellen

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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