Navigating Political Risks: The Role of Firm Political Alignment
56 Pages Posted: 1 May 2023 Last revised: 5 Oct 2023
Date Written: September 30, 2023
Abstract
We examine the determinants and consequences of an important but understudied strategy in managing political risks—firm political alignment (FPA). Using a GPT large language model, we measure FPA as the extent to which firms align their actions and commitments with government agendas as presented in annual reports. Leveraging two political events in China, we find that: 1) as the anti-corruption campaign that started in 2012 and later spread across different provinces serves as a staggered shock that reduces the effectiveness of political ties, firms increase their FPA in response; 2) the extent of FPA largely mitigates the negative market reaction around the announcement of the common prosperity policy in 2021 which heightens policy uncertainty for non-state-owned firms. Overall, our findings provide novel evidence that firms engage in FPA to manage political risk.
Keywords: political alignment, political cost hypothesis; policy risk; common prosperity policy; anti-corruption campaign
JEL Classification: G32, G38, M40, M48, M49
Suggested Citation: Suggested Citation