Firm-level political risk

Measurement and effects

Tarek A. Hassan, Stephan Hollander, L.A.G.M. van Lent, Ahmed Tahoun

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing that it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm’s actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. These results continue to hold after controlling for news about the mean (as opposed to the variance) of political shocks. Interestingly, the vast majority of the variation in our measure is at the firm level rather than at the aggregate or sector level, in the sense that it is neither captured by the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.
Original languageEnglish
Pages (from-to)2135-2202
JournalQuarterly Journal of Economics
Volume134
Issue number4
Early online dateJul 2019
DOIs
Publication statusE-pub ahead of print - Jul 2019

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Political risk
Risk measurement
Stock market volatility
Lobbying
Conference calls
Lobbies
Politicians
Hiring
News
Correlates
Fixed effects
Interaction

Cite this

Hassan, Tarek A. ; Hollander, Stephan ; van Lent, L.A.G.M. ; Tahoun, Ahmed. / Firm-level political risk : Measurement and effects. In: Quarterly Journal of Economics. 2019 ; Vol. 134, No. 4. pp. 2135-2202.
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Firm-level political risk : Measurement and effects. / Hassan, Tarek A.; Hollander, Stephan; van Lent, L.A.G.M.; Tahoun, Ahmed.

In: Quarterly Journal of Economics, Vol. 134, No. 4, 11.2019, p. 2135-2202.

Research output: Contribution to journalArticleScientificpeer-review

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