Does Corporate Diversification Retrench the Effects of Firm-Level Political Risk?
53 Pages Posted: 10 Jul 2020 Last revised: 18 Jan 2022
Date Written: June 17, 2020
This study investigates the effects of firm-level political risk on corporate investments. We find that diversified firms are better able than focused firms in mitigating the impact of idiosyncratic political risk on investments. Diversified firms accomplish this feat via efficient use of the internal capital market that allows segments to alleviate political risk adversity. The effect is working through the channel of exacerbation of financial constraints. 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.
Keywords: Diversification, Political Risk, Corporate Investments, Profitability, Internal Capital, Political Donation
JEL Classification: E22, E24, E32, E6, G31, G32, G38, H32
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