Firm-Level Political Risk and Capital Structure Dynamics
58 Pages Posted: 14 Jul 2020 Last revised: 31 May 2022
Date Written: May 18, 2022
We examine the role of firm-level political risk in the capital structure dynamics for the US-listed firms from 2002 to 2020. We find that higher firm-level political risk can reduce firms' leverage adjustment speed by increasing the costs of adjustment stemming from increasing information asymmetry or agency conflicts, and this effect is more visible in under-leveraged firms than over-leveraged firms. We further find that firms with large exposure to political risk are less active in security market activities. The results are robust to instrument variable regression, alternative leverage measures, alternative model specification and estimation techniques, and additional controls. Our findings highlight the importance of accounting for heterogeneous exposure to political risk in capital structure dynamics.
Keywords: political risk; capital structure; information asymmetry; agency conflicts
JEL Classification: G30, G32, D72
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