Firm-Level Political Risk: Measurement and Effects

88 Pages Posted: 20 Nov 2017

See all articles by Tarek Alexander Hassan

Tarek Alexander Hassan

Boston University

Stephan Hollander

Tilburg University - Tilburg School of Economics and Management

Laurence van Lent

Frankfurt School of Finance and Management

Ahmed Tahoun

London Business School

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Date Written: November 2017

Abstract

We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm’s actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. These results continue to hold after controlling for news about the mean (as opposed to the variance) of political shocks. Interestingly, the vast majority of the variation in our measure is at the firm level rather than at the aggregate or sector level, in the sense that it is neither captured by the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.

Suggested Citation

Hassan, Tarek Alexander and Hollander, Stephan and van Lent, Laurence and Tahoun, Ahmed, Firm-Level Political Risk: Measurement and Effects (November 2017). NBER Working Paper No. w24029, Available at SSRN: https://ssrn.com/abstract=3074207

Tarek Alexander Hassan (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Stephan Hollander

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

P.O. Box 90153
Tilburg, DC Noord-Brabant 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

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

Ahmed Tahoun

London Business School ( email )

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

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