Disaster Risk, Politicians, and Firm Capital Exuding: A New Role of Stock Market Participation

32 Pages Posted: 23 Aug 2021

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Jiawei (Brooke) Wang

University of Iowa - Department of Finance

Date Written: August 20, 2021

Abstract

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

Durnev, Artyom and Wang, Jiawei, Disaster Risk, Politicians, and Firm Capital Exuding: A New Role of Stock Market Participation (August 20, 2021). Available at SSRN: https://ssrn.com/abstract=3908762 or http://dx.doi.org/10.2139/ssrn.3908762

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

12348 DEWHURST AVE
HENRICO, VA Henrico 23233-7848
United States
3193831295 (Phone)

Jiawei Wang

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

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