“Policy Uncertainty, Political Capital, and Firm Risk-Taking”.
|Date:||Tuesday 10 November 2015|
We link the cross-section of rms' sensitivities to economic policy uncertainty to their subsequent political activity and post-election risk-taking behavior. We first show that forms with a high sensitivity to economic policy uncertainty donate more to candidates for elected offce than less-sensitive forms. Using close election outcomes for identification, we then compare differences in post-election risk-taking and performance for forms that experience the same close-election political capital shocks and the same general policy uncertainty shock but that dier in their ex-ante sensitivities to policy uncertainty. We find that policy-sensitive forms' investment, leverage, operating performance, Tobin's Q, option-implied volatility, and CDS spreads respond more sharply to the resolution of uncertainty than policy-neutral forms. However, these effects are largely restricted to rms experiencing a negative political capital shock, suggesting that political connections are an imperfect hedge against shocks to the economic policy environment. Our results highlight many new links between political capital shocks and forms' subsequent decision-making and represent the first attempt in the literature to link forms' policy uncertainty sensitivities to their political activities and subsequent risk-taking and performance.