Policy uncertainty, political capital, and firm risk-taking

Akey, P and Lewellen, S (2017) Policy uncertainty, political capital, and firm risk-taking. Working Paper. London Business School Working Paper.

Abstract

We link the crosssection of firms' sensitivities to economic policy uncertainty to their subsequent political activity and postelection risktaking and performance. We first show that firms with a high sensitivity to economic policy uncertainty donate more to candidates for elected office than lesssensitive firms. Using a sample of close U.S. congressional elections, we then show that plausibly exogenous positive shocks to policysensitive firms' political capital bases produce large subsequent changes in these firms' investment, leverage, firm value, operating performance, CDS spreads, and optionimplied volatility. We do not find similar effects among less policysensitive firms, suggesting that many existing results in the political capital literature appear to be driven by policysensitive firms. We also examine the term structure of credit risk and implied volatility following political capital shocks and find that these shocks are expected to be longlasting in nature. Our results highlight a new potential motivation behind firms' accumulation of political capital and represent the first attempt in the literature to shed light on the relationship between firms' policy sensitivities and their subsequent risktaking and performance following political elections.