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

53 Pages Posted: 10 Jul 2020 Last revised: 18 Jan 2022

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

Kalamazoo 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. 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

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)

Kalamazoo College ( email )

1200 Academy Street
Kalamazoo, MI MI 49006
United States
2254474563 (Phone)
48120 (Fax)

Tarun K. Mukherjee

University of New Orleans ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
102
Abstract Views
808
rank
334,393
PlumX Metrics