Firm-Level Political Risk Flashcards
What is the central research question of the paper?
Can firm-level political risk be measured systematically, and how does it affect corporate decisions like investment and lobbying?
How is firm-level political risk measured?
By calculating the share of earnings call transcripts that contain political bigrams near the words ‘risk’ or ‘uncertainty’ using a pattern-based NLP method.
What is the data source for constructing the political risk measure?
178,173 earnings call transcripts from 7,357 U.S.-listed firms between 2002 and 2016 (from Thomson Reuters StreetEvents).
What is a ‘bigram’ and how is it used in this paper? (2)
- A two-word phrase (e.g., ‘public opinion’)
- used to identify political language and quantify political risk exposure in firm communications.
What is the main validation strategy for the risk measure?
Political risk scores match external political events (elections, regulation), correlate with volatility, and predict firm behavior (investment, lobbying).
What firm behaviors correlate with high political risk? (3)
- Reduced investment and hiring
- increased stock volatility
- greater lobbying/campaign donations—especially among large firms.
What is the main finding about the source of political risk variation?
Over 91% of the variation is firm-specific, not explained by sector, year, or macro variables—suggesting high idiosyncratic exposure.
What topic-specific risks are analyzed?
Political risk scores are broken into 8 areas: economic policy, healthcare, trade, tax, security, technology, environment, and institutions.
How is political risk linked to lobbying behavior?
A one standard deviation rise in topic-specific risk raises the likelihood of lobbying on that topic by 11% in the following quarter.
How is political risk distinguished from political sentiment? (2)
- Risk = co-occurrence with ‘risk/uncertainty’
- sentiment = co-occurrence with positive/negative words; sentiment is controlled for in regressions.
What NLP method is used to construct the political risk measure?
Pattern-based sequence classification using bigrams, focusing on proximity to risk words rather than simple word frequency.
How does the paper filter out irrelevant political mentions?
Introduces a placebo measure (political terms without risk context), which fails to predict firm behavior, validating the main risk measure.
How do political risk shocks affect firm investment?
A one standard deviation increase in political risk leads to a 1.5–2% drop in capex growth, especially for small or regulated firms.
What robustness checks support the measure’s validity?
Includes industry × year fixed effects, alternative outcomes, IVs based on election timing/media exposure, and sentiment controls.
What role does firm size play in response to political risk?
Large firms are more likely to lobby rather than cut investment or hiring, indicating resource-based risk management strategies.
What are the broader economic implications of firm-level political risk?
Political risk reduces investment, affects labor demand, and drives political activity—highlighting firm-level exposure in macroeconomic outcomes.
