The Effect of Political Risk on Shareholder Value and the Mitigating Role of Corporate Social Responsibility (CSR)

Abstract

PurposeThe study investigates the effect of political risk on shareholder value, using an event study and a novel measure of firm-level political risk recently developed by Hassan et al. (2017). In addition, the authors explore how corporate social responsibility (CSR) influences the effect of political risk on shareholder wealth.Design/methodology/approachThe authors exploit the guilty plea of Jack Abramoff, a well-known lobbyist, on January 3, 2006, as an exogenous shock that made lobbying less effective and less useful in the future, depriving firms of an important tool to reduce political exposure.FindingsThe results show that the market reactions are significantly more negative for firms with more political exposure. Additional analysis corroborates the results, including propensity score matching, instrumental-variable analysis and Oster's (2019) method for testing coefficient stability. Finally, the authors note that the adverse effect of political risk on shareholder value is substantially mitigated for firms with strong social responsibility, consistent with the risk mitigation hypothesis.Originality/valueThis study is the first to explore the effect of political risk on shareholder value using a novel measure. Furthermore, it is also the first to show that CSR alleviates the cost of political risk to shareholders.