Corporate Finance in the Interplay of Political Preferences, Corporate Sustainability, and Governance Shocks

Dennis Maximilian Koch

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: Corporate finance increasingly operates in a world shaped by sustainability imperatives, political polarization, and external governance pressures. Yet, the interaction between these forces and firm financial outcomes remains insufficiently understood. This dissertation investigates these interactions in four empirical studies linking corporate finance with political preferences, corporate sustainability, and governance shocks. The first study examines activism by hedge fund investors as an external governance intervention and investigates its interplay with target firms’ environmental and social performance (ESP). We hypothesize that these investors are value-driven and show that they remain largely indifferent to firms’ ESP when selecting targets. However, hedge fund engagements slow firms’ sustainability trajectories through managerial attention shifts and financial constraints. This study highlights the adverse stakeholder consequences of an influential investor group. The second study analyzes the 2024 U.S. presidential election as a policy shock and explores how investors revalue firms based on their exposure to green business models. We document that firms with higher green revenue share experienced negative stock price reactions. This negative effect is considerably stronger for firms in Democratic-leaning states than those in Republican-leaning states, implying that markets anticipate a non-uniform policy impact under the new administration. This study illustrates the policy risk of green firms under political polarization. The third study also centers on the U.S. election and explores how CEO political donations influence their companies’ post-election stock price movements. We find that CEO personal alignment with the winning Republican party leads to significant post-election stock price gains, while support for the Democratic party is associated with value losses. This study emphasizes investors’ heightened sensitivity to executive political loyalty in a highly polarized environment. The fourth study investigates how CEO political preferences shape equity pricing over the long run. Firms led by Republican-leaning CEOs exhibit significantly higher expected returns, explained by reduced investor attention and valuation. This study reveals that managerial political preferences persistently affect market perception and asset pricing. Taken together, this research reveals how political preferences, sustainability commitments, and governance shocks jointly shape corporate outcomes. This dissertation contributes to the literatures on corporate finance, political economy, and sustainability while offering relevant implications for executives, investors, and policymakers facing rising political and environmental uncertainty.

Date: 2026-04-23
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