Firm-Level Political Risk: Measurement and Effects*

Abstract

We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual U.S. 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 captured neither 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.

Really Uncertain Business Cycles

“…Rather, we see our policy experiments as a means to document and quantify the effects of such policies in times of heightened uncertainty. It is also worth noting that this ignores the direct impact of policy on uncertainty as studied by papers such as Baker, Bloom, and Davis (2016) and Hassan, Hollander, van Lent, and Tahoun (2017).…”

The Global Impact of Brexit Uncertainty

“…It is well-recognized in both theoretical and empirical work that uncertainty can directly influence firm-level investments and employment (Pindyck, 1988;Bernanke, 1983;Dixit and Pindyck, 1994;Bloom et al, 2007). Furthermore, recent developments in the literature have highlighted that first and second moment shocks can appear together, either amplifying or confounding each other (Bloom et al, 2018;Berger et al, 2017;Hassan et al, 2019). We examine these predictions in the context of Brexit, which (it has been argued) represents an "almost ideal" uncertainty shock inasmuch as it was large, unanticipated, and delayed in implementation (Fisman and Zitzewitz, 2019;Born et al, 2019).…”

“…While prior studies have shown that uncertainty has far-reaching consequences on firm policies of first order importance (such as investments and hiring), this work has been hampered by the lack of "sound, flexible measures of uncertainty" (Altig et al, 2019). Our work highlights the versatility of text-based measures of uncertainty, adding to recent work which pioneered these approaches in the context of political uncertainty (Baker et al, 2016;Hassan et al, 2019) and applied them to themes like trade policy (Handley and Li, 2018;Caldara et al, 2019;Kost, 2019).…”

Federal Judge Ideology: A New Measure of Ex Ante Litigation Risk

“…In online appendix table 12, we examine whether judge ideology's effect varies with firms' political donations(Hassan, Hollander, van Lent, and Tahoun [2017]). Our main findings remain robust after including the firms' political donations and its interaction with LiberalCourt.…”