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Political Risk: Origins, Measurement, and Effects

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Pennsylvania Convention Center, 204-C
Hosted By: American Economic Association
  • Chair: Tarek A. Hassan, Boston University, NBER, and CEPR

What Triggers National Stock Market Jumps?

Scott Baker
,
Northwestern University
Nicholas Bloom
,
Stanford University
Steven Davis
,
University of Chicago
Marco Sammon
,
Northwestern University

Abstract

Drawing on next-day newspaper accounts for 22 countries since 1985 or earlier, we develop new evidence about the forces that trigger large daily jumps in national stock markets. We find that U.S. developments trigger a hugely disproportionate share of equity market jumps across the globe relative to the American share of global output, international trade and stock market capitalization. The U.S. role in this regard dwarfs the role of Europe, China and other large regions and countries. In line with previous work on conditional heteroscedasticity in equity returns, we find strong evidence that a national equity market jump today leads to a persistent rise in the probability of another daily jump in the ensuing weeks and months. Unlike earlier work, we also show that conditional persistence varies by jump reason, as seen by contemporaneous newspaper accounts. In particular, jumps that reflect macroeconomic news exhibit greater conditional persistence than jumps attributed to monetary policy, military actions and news about corporate profits or commodity markets. News about the macroeconomy accounts for 23-38% of equity market jumps in advanced economies, less in other countries.

Policy Uncertainty, Political Capital, and Firm Risk-taking

Pat Akey
,
University of Toronto
Stefan Lewellen
,
London Business School

Abstract

We propose and test a new channel of corporate political involvement. In our channel, firms vary in the extent to which they face uncertainty about future government policies. Firms that are “policy-sensitive” have a stronger incentive to increase their political connectedness, and their risk-taking and performance should respond more strongly to the gain or loss of a political connection. We verify these patterns in the data using a sample of corporate donations to candidates in close U.S. congressional elections. We also find that many existing results in the political connections literature appear to be driven by policy-sensitive firms

Firm-level Political Risk: Measurement and Effects

Tarek A. Hassan
,
Boston University, NBER, and CEPR
Stephan Hollander
,
Tilburg University
Laurence van Lent
,
Tilburg University
Ahmed Tahoun
,
London Business School

Abstract

We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing that it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm's actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. Interestingly, we find that the incidence of political risk across firms is far more heterogeneous and volatile than previously thought. The vast majority of the variation in our measure is at the firm-level rather than at the aggregate or sector-level, in the sense that it is neither captured by time fixed effects and the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.
Discussant(s)
Stephen Terry
,
Boston University
Alberto Bisin
,
New York University
JEL Classifications
  • G0 - General
  • E0 - General