Navigating Political Risks: The Role of Firm Political Alignment

56 Pages Posted: 1 May 2023 Last revised: 5 Oct 2023

See all articles by Ping Jiang

Ping Jiang

University of International Business and Economics

Jing Li

Simon Fraser University

Minjia Li

Alberta School of Business, University of Alberta

Jenny Li Zhang

University of British Columbia - Sauder School of Business

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

Jiang, Ping and Li, Jing and Li, Minjia and Zhang, Jenny Li, Navigating Political Risks: The Role of Firm Political Alignment (September 30, 2023). Available at SSRN: https://ssrn.com/abstract=4430507 or http://dx.doi.org/10.2139/ssrn.4430507

Ping Jiang

University of International Business and Economics ( email )

Jing Li

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Minjia Li

Alberta School of Business, University of Alberta ( email )

11211 Saskatchewan Dr NW
Edmonton, Alberta T6G 2R6
Canada

Jenny Li Zhang (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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