Firm-level political risk and corporate investment

Abstract

This paper investigates the relationship between political uncertainty and capital investment with an up-to-date measure of firm-level political risk using transcripts of each firm’s earnings conference call with tools from computational linguistics by Hassan et al. (2019). This measure overcomes some limitations of previous proxies of political uncertainty, giving more reliability to my results. Using the firm-level political risk index, the empirical results provides strong evidence that political uncertainty has negative effect on corporate investment. More importantly, the results suggest that investment irreversibility is one of the sources which affect to the intensity of the negative effect of political risk. All the results are significant even after controlling non-political uncertainty, as well as the heterogeneity across time and industry, time-by-industry or time and firm with fixed effects.