The effect of political risk on shareholder value and the mitigating role of corporate social responsibility (CSR)

Pattanaporn Chatjuthamard, Pornsit Jiraporn, Pattarake Sarajoti, Manohar Singh

Research output: Contribution to journalArticlepeer-review

Abstract

Purpose: The study investigates the effect of political risk on shareholder value, using an event study and a novel measure of firm-level political risk recently developed by Hassan et al. (2017). In addition, the authors explore how corporate social responsibility (CSR) influences the effect of political risk on shareholder wealth. Design/methodology/approach: The authors exploit the guilty plea of Jack Abramoff, a well-known lobbyist, on January 3, 2006, as an exogenous shock that made lobbying less effective and less useful in the future, depriving firms of an important tool to reduce political exposure. Findings: The results show that the market reactions are significantly more negative for firms with more political exposure. Additional analysis corroborates the results, including propensity score matching, instrumental-variable analysis and Oster's (2019) method for testing coefficient stability. Finally, the authors note that the adverse effect of political risk on shareholder value is substantially mitigated for firms with strong social responsibility, consistent with the risk mitigation hypothesis. Originality/value: This study is the first to explore the effect of political risk on shareholder value using a novel measure. Furthermore, it is also the first to show that CSR alleviates the cost of political risk to shareholders.

Original languageEnglish (US)
Pages (from-to)1217-1230
Number of pages14
JournalManagerial Finance
Volume46
Issue number10
DOIs
StatePublished - May 21 2020

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting (miscellaneous)
  • Finance

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