Aggregate and Idiosyncratic Political Risk: Measurement and Effects

74 Pages Posted: 28 Sep 2016 Last revised: 20 Jan 2017

Tarek A. Hassan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stephan Hollander

Tilburg University - Tilburg School of Economics and Management

Laurence van Lent

Tilburg University

Ahmed Tahoun

London Business School

Date Written: September 26, 2016

Abstract

We propose a new measure of political risk faced by individual US-firms based on textual analysis of earnings conference call transcripts: the share of the conversation between management and analysts that is devoted to political topics. Our measure correlates significantly with firm-level stock return volatility, even after controlling for firm and time fixed effects. We find that increases in idiosyncratic political risk are associated with decreases in investment and hiring, and that the dispersion of idiosyncratic political risk tends to increase significantly in times of high aggregate political risk. About two thirds of the variation in political risk is idiosyncratic in the sense that it is neither captured by firm or time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. Further decomposing our measure by political topic, we find that discussion of risk associated with corporate regulation and health care is associated with the largest decreases in investment. We also find that firms actively manage political risk through lobbying: firms that devote more time to discussing the risk associated with a given political topic tend to increase lobbying expenses on that topic that quarter. These effects are most pronounced for large firms and firms headquartered in states that are associated with higher levels of political corruption.

Keywords: Political uncertainty, quantification, firm-level, lobbying

JEL Classification: D80, E22, G18, G38, H32, L50

Suggested Citation

Hassan, Tarek A. and Hollander, Stephan and van Lent, Laurence and Tahoun, Ahmed, Aggregate and Idiosyncratic Political Risk: Measurement and Effects (September 26, 2016). Available at SSRN: https://ssrn.com/abstract=2838644 or http://dx.doi.org/10.2139/ssrn.2838644

Tarek Alexander Hassan

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/tarek.hassan/index.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Stephan Hollander

Tilburg University - Tilburg School of Economics and Management ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands
+31 13 466 8288 (Phone)
+31 13 466 8001 (Fax)

HOME PAGE: http://www.uvt.nl/people/s.hollander

Laurence Van Lent (Contact Author)

Tilburg University ( email )

Tilburg School of Economics and Management
P.O. Box 90153
5000 LE Tilburg
Netherlands
+31 13 4668288 (Phone)
+31 13 4668001 (Fax)

HOME PAGE: http://www.tilburguniversity.nl/people/vanlent

Ahmed Tahoun

London Business School ( email )

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

Paper statistics

Downloads
372
Rank
64,011
Abstract Views
1,736