Firm-level political uncertainty and risk-taking

Abstract

Research shows that political uncertainty affects general economic and firm-related outcomes, but much less is known about how it affects firms' risk taking. Taking advantage of a new construct, we focus on a firm-level political uncertainty index measure because it enables us to examine both time-series and cross-sectional variations in political uncertainty. Using a large sample of non-financial U.S. firms covering the 2003 to 2017 period, we find strong evidence that firm-level political uncertainty, measured as the portion of earnings call conversations with financial analysts that focus on political uncertainty, is positively associated with corporate risk taking. Further analysis shows that the effect of firm-level political uncertainty on risk taking is more pronounced for firms' that have more growth opportunities, dependent on external financing and corporate lobbying incentives. Our results are economically significant and robust to alternative risk-taking measures.