Description
In this study, I test whether firms reduce the information asymmetry stemming from the political process by investing in political connections. I expect that connected firms enjoy differential access to relevant political information, and use this information to mitigate the negative consequences of political uncertainty. I investigate this construct in the context of firm-specific investment, where prior literature has documented a negative relation between investment and uncertainty. Specifically, I regress firm investment levels on the interaction of time-varying political uncertainty and the degree of a firm's political connectedness, controlling for determinants of investment, political participation, general macroeconomic conditions, and firm and time-period fixed effects. Consistent with prior work, I first document that firm-specific investment levels are significantly lower during periods of increased uncertainty, defined as the year leading up to a national election. I then assess the extent that political connections offset the negative effect of political uncertainty. Consistent with my hypothesis, I document the mitigating effect of political connections on the negative relation between investment levels and political uncertainty. These findings are robust to controls for alternative explanations related to the pre-electoral manipulation hypothesis and industry-level political participation. These findings are also robust to alternative specifications designed to address the possibility that time-invariant firm characteristics are driving the observed results. I also examine whether investors consider time-varying political uncertainty and the mitigating effect of political connections when capitalizing current earnings news. I find support that the earnings-response coefficient is lower during periods of increased uncertainty. However, I do not find evidence that investors incorporate the value relevant information in political connections as a mitigating factor.
Details
Title
- The role of political connections in mitigating policy uncertainty: evidence from firm-specific investment
Contributors
- Wellman, Laura (Author)
- Dhaliwal, Dan (Thesis advisor)
- Hillegeist, Stephen (Thesis advisor)
- Walther, Beverly (Committee member)
- Mikhail, Mike (Committee member)
- Hillman, Amy (Committee member)
- Brown, Jenny (Committee member)
- Arizona State University (Publisher)
Date Created
The date the item was original created (prior to any relationship with the ASU Digital Repositories.)
2014
Subjects
Resource Type
Collections this item is in
Note
- thesisPartial requirement for: Ph.D., Arizona State University, 2014
- bibliographyIncludes bibliographical references (p. 42-46)
- Field of study: Accountancy
Citation and reuse
Statement of Responsibility
by Laura Wellman