The effect of political risk on shareholder value and the mitigating role of corporate social responsibility (CSR)
ISSN: 0307-4358
Article publication date: 10 June 2020
Issue publication date: 11 November 2020
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.
Keywords
Acknowledgements
The research was funded by Chulalongkorn University under the Ratchadapisek Sompoch Endowment Fund (2020) through The Collaborating Centre for Labor Research at Chulalongkorn University (CU-Collar) (763008) and The Center of Excellence in Management Research for Corporate Governance and Behavioral Finance.
Citation
Chatjuthamard, P., Jiraporn, P., Sarajoti, P. and Singh, M. (2020), "The effect of political risk on shareholder value and the mitigating role of corporate social responsibility (CSR)", Managerial Finance, Vol. 46 No. 10, pp. 1217-1230. https://doi.org/10.1108/MF-09-2019-0475
Publisher
:Emerald Publishing Limited
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