Economics at your fingertips  

Political risk and cost of equity: The mediating role of political connections

Anh Viet Pham

Journal of Corporate Finance, 2019, vol. 56, issue C, 64-87

Abstract: This paper studies the mediating role that political connections play in the relationship between cost of equity and political risk (i.e., partisan political conflict and economic policy uncertainty). The key channel is the information advantage firms achieve from connections to politicians. I show that, in the face of rising economic policy uncertainty, the financial reports of firms with strong political connections exhibit less-uncertain language than non-connected peers, consistent with superior information enabling connected firms to hedge against policy uncertainty. Consequently, connected firms' cost of equity is less sensitive to rising economic policy uncertainty. However, in the event of extreme partisan political conflict, the possibility of legislative gridlock and resulting loss of information advantage increases the exposure of connected firms. This manifests in heightened uncertainty expressed in financial disclosures and consequently cost of equity. Adding further support to the proposed information channel, these differential effects of partisan conflict and economic policy uncertainty are shown to concentrate in industries where firm success is highly dependent on government spending and policy.

Keywords: Partisan conflict; Policy uncertainty; Cost of equity; Disclosure uncertainty; Political connections (search for similar items in EconPapers)
JEL-codes: G30 G32 G38 D72 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-08-10
Handle: RePEc:eee:corfin:v:56:y:2019:i:c:p:64-87