Political geography and the value relevance of real options

Abstract

Corporate political geography influences the value of real options because proximity to political power can trigger greater exposure to uncertainty and/or more growth opportunities. Our empirical tests reveal that although areas closely aligned with the president experience a boost in real options’ value relevance, this effect is significant only among the majority of firms that are neither politically connected nor reliant on government contracts. Our findings are consistent with the notion that political connections essentially eliminate policy uncertainty (render real options value-irrelevant), whereas government dependence additionally inhibits investment in growth opportunities (ability to exploit volatility) from proximity to political power.