Firm-Level Political Risk and Capital Structure Dynamics

60 Pages Posted: 14 Jul 2020 Last revised: 7 Apr 2021

See all articles by Kai Wu

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Seiwai Lai

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: April 1, 2021

Abstract

We examine the role of firm-level political risk in the capital structure dynamics for the U.S. listed firms from 2002 to 2017. We find that firm-level political risk facilitates firms' speed of adjustment towards its target leverage, and such a positive effect holds for categorical political risk. We also find that the positive effect is visible in overleveraged firms. Additionally, the cost of equity sensitivity and value of financial flexibility are identified as the possible mechanisms. The results remain intact after addressing identification issues and are robust to alternative leverage measures, model specifications, and estimation techniques. Our findings highlight the importance of accounting for heterogeneous exposure to political risk in capital structure dynamics.

Keywords: political risk; capital structure; adjustment cost; financial flexibility

JEL Classification: G30, G32, D72

Suggested Citation

Wu, Kai and Lai, Seiwai, Firm-Level Political Risk and Capital Structure Dynamics (April 1, 2021). Available at SSRN: https://ssrn.com/abstract=3615532 or http://dx.doi.org/10.2139/ssrn.3615532

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Seiwai Lai

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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