Does Corporate Diversification Retrench the Effects of Firm-Level Political Risk?

59 Pages Posted: 10 Jul 2020 Last revised: 2 Apr 2021

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Md. Sydul Karim

Dickinson College

Tarun K. Mukherjee

University of New Orleans

Date Written: June 17, 2020

Abstract

This study investigates the effects of firm-level political risk on corporate investments and operating efficiencies for industrially diversified and focused firms. Using firm-level political risk data from Hassan et al.(2019), we document that both political risk and diversification lead to reduced corporate investments and profitability. However, diversified firms are better able than focused firms in mitigating idiosyncratic political risk. We provide extensive evidence that diversified firms accomplish this feat via efficient use of the internal capital market that allows segments to alleviate the adverse effects of political uncertainty. Diversification increases investment relative to focused firms during the period of high economic uncertainties. When exposed to political risk, diversified firms do not spend more on lobbying and political donations than the focused firms in the subsequent period, implying that diversified firms do not manage political risk politically. Our main findings are robust to a battery of endogeneity tests and sensitivity measures.

Keywords: Diversification, Political Risk, Corporate Investments, Profitability, Internal Capital, Political Donation

JEL Classification: E22, E24, E32, E6, G31, G32, G38, H32

Suggested Citation

Hassan, M. Kabir and Karim, Md. Sydul and Mukherjee, Tarun K., Does Corporate Diversification Retrench the Effects of Firm-Level Political Risk? (June 17, 2020). Available at SSRN: https://ssrn.com/abstract=3629661 or http://dx.doi.org/10.2139/ssrn.3629661

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Md. Sydul Karim (Contact Author)

Dickinson College ( email )

P.O. BOX 1773
CARLISLE, PA 17013
United States
2254474563 (Phone)

Tarun K. Mukherjee

University of New Orleans ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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