Addressing Risk by Doing Good: Business Response to Government Policy Initiative

Abstract

Why do some firms in authoritarian regimes respond actively to government policy initiatives while others resist? This article highlights firm-level political risk as the primary motivator of responses, allowing firms to defend their property rights in weak institutional environments. Supporting evidence derives from the responses of listed firms to the Targeted Poverty Alleviation campaign launched by China in 2015. Empirically, firm-level political risk is measured with a text-as-data approach involving 418,480 Q&As in the meetings between institutional investors and listed companies, not only capturing within-firm variations but also providing a substantial understanding of the political risk firms face. Difference-in-differences models show that political risks increase firms’ expenditure on poverty-reduction programs, especially for those without preexisting political connections. Evidence of regulation decisions suggests that firms actively responding to poverty-alleviation initiatives received preferential treatment in terms of the size of fines and the likelihood of punishment for violation of regulations.

Keywords: state-business relations, political risk, corporate political strategy

JEL Classification: M14, P26