We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints, and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms are compensated with high returns when major unexpected political shocks happen.
{"title":"Is Firm-Level Political Risk Priced in the Equity Option Market?","authors":"Thang Ho, Anastasios Kagkadis, George Jiaguo Wang","doi":"10.2139/ssrn.3943958","DOIUrl":"https://doi.org/10.2139/ssrn.3943958","url":null,"abstract":"\u0000 We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints, and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms are compensated with high returns when major unexpected political shocks happen.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"114 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129737945","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Dien Giau Bui, I. Hasan, Chih-Yung Lin, Chris Vaike
Pástor and Veronesi (2012) develop a general equilibrium model to examine the relation between policy uncertainty and asset prices. Extending to their study, we develop a novel measure of firms’ uncertainty about the change in bilateral trade flows between each country and the US. We investigate the effect of trade policy uncertainty on the stock returns of firms in 52 countries around the 2016 US presidential election. Our findings show that firms with greater uncertainty about trade policy experience more negative stock returns during the election. Our results further show that this effect is more prominent for riskier firms or firms with more firm-specific information in their stock prices. Additionally, this effect becomes stronger in countries with closer social, economic, and political integration with the US or with stronger investor protection.
{"title":"Trade Policy Uncertainty and Global Stock Returns: Evidence from the 2016 US Presidential Election","authors":"Dien Giau Bui, I. Hasan, Chih-Yung Lin, Chris Vaike","doi":"10.2139/ssrn.3860623","DOIUrl":"https://doi.org/10.2139/ssrn.3860623","url":null,"abstract":"Pástor and Veronesi (2012) develop a general equilibrium model to examine the relation between policy uncertainty and asset prices. Extending to their study, we develop a novel measure of firms’ uncertainty about the change in bilateral trade flows between each country and the US. We investigate the effect of trade policy uncertainty on the stock returns of firms in 52 countries around the 2016 US presidential election. Our findings show that firms with greater uncertainty about trade policy experience more negative stock returns during the election. Our results further show that this effect is more prominent for riskier firms or firms with more firm-specific information in their stock prices. Additionally, this effect becomes stronger in countries with closer social, economic, and political integration with the US or with stronger investor protection.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129904896","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In many countries, disproportionately many firms locate their headquarters in the capital city. Spatial proximity to a country’s leading politicians may be beneficial for a number of reasons. Since neither firms nor governments move randomly, the effects of firms' co-locating with the government are normally hard to identify. I solve this problem by examining a unique event—the decision to relocate the German federal government from Bonn to Berlin in 1991. Following reunification, there was a free vote in the German parliament on the future location of the government. Berlin won by a narrow margin, an event that could not be anticipated even days before and that is free from confounding factors. Firms with corporate headquarters in Berlin experience abnormal equity returns of more than 3 percent following the relocation decision.
{"title":"Precious Neighbors: The Value of Co-locating with the Government","authors":"Jörg R. Stahl","doi":"10.2139/ssrn.3801772","DOIUrl":"https://doi.org/10.2139/ssrn.3801772","url":null,"abstract":"\u0000 In many countries, disproportionately many firms locate their headquarters in the capital city. Spatial proximity to a country’s leading politicians may be beneficial for a number of reasons. Since neither firms nor governments move randomly, the effects of firms' co-locating with the government are normally hard to identify. I solve this problem by examining a unique event—the decision to relocate the German federal government from Bonn to Berlin in 1991. Following reunification, there was a free vote in the German parliament on the future location of the government. Berlin won by a narrow margin, an event that could not be anticipated even days before and that is free from confounding factors. Firms with corporate headquarters in Berlin experience abnormal equity returns of more than 3 percent following the relocation decision.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115015481","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using project-level data on changes in firms’ investments of IPO proceeds around deaths, term limits, and mandatory retirements of local politicians, this paper studies corporate investment as a novel channel of political activity. Following exogenous turnovers of provincial governors in China, local firms initiate new projects and cancel/modify existing projects to cater to incoming politicians. Subsequently, they obtain better access to bank credit, higher government subsidies, lower effective tax rates, and better performance. Furthermore, their top managers are more likely to be elected to political office. These effects are followed by increases in local fiscal deficits.
{"title":"The Politics of Corporate Investment: Evidence from Political Turnovers and IPO Proceeds","authors":"R. Duchin, Hongbo Pan, Wei Shi","doi":"10.2139/ssrn.3782127","DOIUrl":"https://doi.org/10.2139/ssrn.3782127","url":null,"abstract":"Using project-level data on changes in firms’ investments of IPO proceeds around deaths, term limits, and mandatory retirements of local politicians, this paper studies corporate investment as a novel channel of political activity. Following exogenous turnovers of provincial governors in China, local firms initiate new projects and cancel/modify existing projects to cater to incoming politicians. Subsequently, they obtain better access to bank credit, higher government subsidies, lower effective tax rates, and better performance. Furthermore, their top managers are more likely to be elected to political office. These effects are followed by increases in local fiscal deficits.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130795517","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Joonkyu Choi, Veronika Penciakova, Felipe E. Saffie
Using American Recovery and Reinvestment Act (ARRA) data, we show that firms lever their political connections to win stimulus grants and public expenditure channeled through politically connected firms hinders job creation. We build a unique database that links campaign contributions and state legislative election outcomes to ARRA grant allocation. Using exogenous variation in political connections based on ex-post close elections held before ARRA, we causally show that politically connected firms are 64 percent more likely to secure a grant. Based on an instrumental variable approach, we also establish that state-level employment creation associated with grants channeled through politically connected firms is nil. Therefore, the impact of fiscal stimulus is not only determined by how much is spent, but also by how the expenditure is allocated across recipients.
{"title":"Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier","authors":"Joonkyu Choi, Veronika Penciakova, Felipe E. Saffie","doi":"10.29338/WP2021-13","DOIUrl":"https://doi.org/10.29338/WP2021-13","url":null,"abstract":"Using American Recovery and Reinvestment Act (ARRA) data, we show that firms lever their political connections to win stimulus grants and public expenditure channeled through politically connected firms hinders job creation. We build a unique database that links campaign contributions and state legislative election outcomes to ARRA grant allocation. Using exogenous variation in political connections based on ex-post close elections held before ARRA, we causally show that politically connected firms are 64 percent more likely to secure a grant. Based on an instrumental variable approach, we also establish that state-level employment creation associated with grants channeled through politically connected firms is nil. Therefore, the impact of fiscal stimulus is not only determined by how much is spent, but also by how the expenditure is allocated across recipients.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127208056","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Before 2009, the market average price earnings ratio of Chinese firms is significantly higher than that of the U.S. firms, while after 2009, the valuation gap reverses. Using data from 1995 to 2018, we examine the dynamics and sources of valuation differentials between comparable Chinese and U.S. firms. The sectoral composition of the indices plays a minimal role but growth expectations, financial openness, financial development, and (changes in) the investor base, all contribute substantially to the cross-sector and time-series variation of the valuation differentials. Financial openness and changing growth expectations are the most important contributors.
{"title":"The China-U.S. Equity Valuation Gap","authors":"G. Bekaert, Shuojia Ke, Xiaoyan Zhang","doi":"10.2139/ssrn.3760292","DOIUrl":"https://doi.org/10.2139/ssrn.3760292","url":null,"abstract":"Before 2009, the market average price earnings ratio of Chinese firms is significantly higher than that of the U.S. firms, while after 2009, the valuation gap reverses. Using data from 1995 to 2018, we examine the dynamics and sources of valuation differentials between comparable Chinese and U.S. firms. The sectoral composition of the indices plays a minimal role but growth expectations, financial openness, financial development, and (changes in) the investor base, all contribute substantially to the cross-sector and time-series variation of the valuation differentials. Financial openness and changing growth expectations are the most important contributors.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131400120","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the influence of media attention on regulatory efficiency of corporate violations in restrictive media environment. Using a hand-collected sample of corporate violations in China during 1998-2018, we find that fraudulent firms accompanied by more negative media attention are associated with a shorter duration of the violation being investigated and enforced. The effect is not diminished by the political connections of the fraudulent firms and is robust to accounting for potential confounding factors. We interpret our findings to suggest that by playing both an informational intermediary role and a pressure-exerting role in influencing regulatory efficiency, the media can serve as an effective governance mechanism even in markets with strict media control.
{"title":"Media Attention and Regulatory Efficiency of Corporate Violations: Evidence from China","authors":"Zhiqian Jiang, Baixiao Liu, Jinsong Liu, Qianwei Ying","doi":"10.2139/ssrn.3494688","DOIUrl":"https://doi.org/10.2139/ssrn.3494688","url":null,"abstract":"We examine the influence of media attention on regulatory efficiency of corporate violations in restrictive media environment. Using a hand-collected sample of corporate violations in China during 1998-2018, we find that fraudulent firms accompanied by more negative media attention are associated with a shorter duration of the violation being investigated and enforced. The effect is not diminished by the political connections of the fraudulent firms and is robust to accounting for potential confounding factors. We interpret our findings to suggest that by playing both an informational intermediary role and a pressure-exerting role in influencing regulatory efficiency, the media can serve as an effective governance mechanism even in markets with strict media control.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125194196","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the heretofore-unexplored costs of political connections in the context of China’s corporate restructuring. Leveraging original surveys of the same Chinese firms over an eleven-year period and the variations in their post-restructuring board composition, we find that restructured state-owned enterprises (SOEs) with political connections, measured as current or former government officials on the firm board, receive more preferential access to key inputs and policy opportunities controlled by the state, but they also pay more tax, independent of profits. We argue this is repayment by politically connected firms for the state’s “helping hand.” Our findings suggest that state-firm relations be recast as a reciprocal exchange rather than a one-sided provision of benefits from the state to its politically connected firms. Shifting the focus from profits to taxes also offers an explanation as to why China continues to favour SOEs over the private sector even when they are less profitable.
{"title":"Repaying the State’s 'Helping Hand': The Costs of Political Connections in China","authors":"Chaohua Han, Xiaojun Li, Jean C. Oi","doi":"10.2139/ssrn.3684857","DOIUrl":"https://doi.org/10.2139/ssrn.3684857","url":null,"abstract":"This study examines the heretofore-unexplored costs of political connections in the context of China’s corporate restructuring. Leveraging original surveys of the same Chinese firms over an eleven-year period and the variations in their post-restructuring board composition, we find that restructured state-owned enterprises (SOEs) with political connections, measured as current or former government officials on the firm board, receive more preferential access to key inputs and policy opportunities controlled by the state, but they also pay more tax, independent of profits. We argue this is repayment by politically connected firms for the state’s “helping hand.” Our findings suggest that state-firm relations be recast as a reciprocal exchange rather than a one-sided provision of benefits from the state to its politically connected firms. Shifting the focus from profits to taxes also offers an explanation as to why China continues to favour SOEs over the private sector even when they are less profitable.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132480821","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study how politicians' compensation affects the real economy. Specifically, we investigate the effect of legislators' wages on business activity in Brazil. We identify our results using a constitutional amendment that established salary caps for legislators in a given municipality based on arbitrary population cutoffs. We find that higher politician wages are associated with increases in firm and job creation and firms' average startup investments. Better paid legislators increase the municipality's budget surplus while increasing expenditure in items that increase local economic productivity. Our evidence highlights the potential adverse effects on the private sector of lowering politicians' salaries.
{"title":"The Real Effects of Politicians' Compensation","authors":"Igor Cunha, Paulo Manoel","doi":"10.2139/ssrn.3471509","DOIUrl":"https://doi.org/10.2139/ssrn.3471509","url":null,"abstract":"We study how politicians' compensation affects the real economy. Specifically, we investigate the effect of legislators' wages on business activity in Brazil. We identify our results using a constitutional amendment that established salary caps for legislators in a given municipality based on arbitrary population cutoffs. We find that higher politician wages are associated with increases in firm and job creation and firms' average startup investments. Better paid legislators increase the municipality's budget surplus while increasing expenditure in items that increase local economic productivity. Our evidence highlights the potential adverse effects on the private sector of lowering politicians' salaries.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128929607","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the consequences of local laws modeled on the American Anti-Corruption Act (“AACA”), which aims to constrain corporate political activities. Consistent with these laws significantly increasing the costs of forging local political connections, we find a reduction in the likelihood that: (i) local incumbent politicians are re-elected; and (ii) firms receive local government contracts. We also find a negative capital market reaction to the AACA — indicating that shareholders punish firms for losing valuable connections, and a decline in opportunistic reporting, suboptimal investments and corporate risk-taking. Our evidence feeds into the calls to legislate the AACA at the state (federal) level.
{"title":"Do Local Constraints on Corporate Political Activities Really Bite? Evidence from Local Adoptions of the American Anti-Corruption Act","authors":"Jeong‐Bon Kim, Albert Mensah","doi":"10.2139/ssrn.3855309","DOIUrl":"https://doi.org/10.2139/ssrn.3855309","url":null,"abstract":"We examine the consequences of local laws modeled on the American Anti-Corruption Act (“AACA”), which aims to constrain corporate political activities. Consistent with these laws significantly increasing the costs of forging local political connections, we find a reduction in the likelihood that: (i) local incumbent politicians are re-elected; and (ii) firms receive local government contracts. We also find a negative capital market reaction to the AACA — indicating that shareholders punish firms for losing valuable connections, and a decline in opportunistic reporting, suboptimal investments and corporate risk-taking. Our evidence feeds into the calls to legislate the AACA at the state (federal) level.","PeriodicalId":189146,"journal":{"name":"FEN: Political Risk & Corporate Finance (Topic)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127163520","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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