Disaster Risk, Politicians, and Firm Capital Exuding: A New Role of Stock Market Participation
32 Pages Posted: 23 Aug 2021
Date Written: August 20, 2021
We propose a new function of stock market – to align voters’ preferences to politicians’ policies. We build a model with politicians’ ability to abate negative disaster shocks. Pro-business politicians are more likely to get re-elected when voters hold firm equity, and because of less severe disaster shocks, firms exude less capital and allocate investment more efficiently. We construct a novel stock market participation data for U.S. states using IRS statistics. We find that companies in states with higher stock market participation invest more efficiently and elect pro-business politicians. We use a novel neighboring states methodology and financial literacy instrument to eliminate endogeneity concerns.
Keywords: disaster risk, politics, firm investment
JEL Classification: G10
Suggested Citation: Suggested Citation