Firm-level political uncertainty, corporate lobbying and risk-taking

The study investigates whether firm-level political uncertainty influences managerial risk-taking decisions among U.S. listed non-financial firms from 2002 to 2021. Prior work links aggregate political uncertainty to adverse economic outcomes and often to lower corporate risk-taking and investment. However, exposure to political risk varies across firms, and some firms may mitigate uncertainty by engaging in lobbying and cultivating political connections that confer informational advantages. The authors pose an empirical question: does firm-level political uncertainty increase or decrease corporate risk-taking, and how does corporate lobbying shape this relationship? They formalize two hypotheses: (H1) There is a relationship between firm-level political uncertainty and firms’ risk-taking behavior; (H2) The association between firm-level political uncertainty and risk-taking is strengthened or weakened depending on firms’ engagement in lobbying activities. The purpose is to move beyond economy-wide measures of political uncertainty to a micro-level, firm-specific measure and assess its implications for risk-taking while accounting for firm characteristics, macroeconomic conditions, and potential endogeneity.

The paper reviews research showing that political uncertainty affects financial markets, financing costs, investment timing, and capital allocation (e.g., Pástor and Veronesi, 2013; Baker et al., 2016; Waisman et al., 2015; King et al., 2021). Much of this literature uses aggregate (economy-wide) uncertainty measures and often finds a negative association with firm risk-taking and investment, driven by higher financing costs, greater cash flow volatility, and managerial conservatism (Bernanke, 1983; Bloom, 2009; Panousi and Papanikolaou, 2012; Tran, 2019). The authors argue that treating firms’ exposure as homogeneous is unrealistic. They highlight a firm-level political risk measure developed by Hassan et al. (2019), based on political content and uncertainty language in earnings call transcripts, which captures cross-sectional heterogeneity. Prior work using firm-level measures links political uncertainty to higher loan costs and debt market frictions (Saffar et al., 2019; Gad et al., 2022) and to stock return effects (Gorbatikov et al., 2019). The literature also documents that firms respond to political uncertainty by intensifying lobbying and building political ties that can alleviate information asymmetry and potentially raise risk-taking (Akey and Lewellen, 2017; Wellman, 2017; Pham, 2019; Boubakri et al., 2013). Together, these strands yield competing predictions, motivating the hypotheses that firm-level political uncertainty is related to risk-taking and that lobbying moderates this relationship.

Data and sample: The study analyzes 32,695 firm-year observations for U.S. non-financial firms (Compustat, excluding SIC 6000–6999) from 2002–2021. Firm-level political uncertainty data are sourced from Hassan et al. (2019). Macroeconomic variables come from World Bank World Development Indicators. Variables are winsorized at the 1st and 99th percentiles.

Risk-taking measures: Primary measure (RISK_1) is the standard deviation over the next three years of the difference between firm ROA and industry-average ROA, where ROA = EBIT/total assets. Alternative measures include: RISK_2 (range of annual EBITDA/total assets over the next four years), RISK_3 (volatility of EBITDA/total assets over the next four years), RISK_4 (standard deviation of ROA over years t to t+3), and RISK_5 (standard deviation of EBIT/sales over years t to t+3).

Firm-level political uncertainty: Following Hassan et al. (2019), the authors apply a machine-learning approach to earnings call transcripts, identifying political bigrams in proximity to synonyms of risk/uncertainty and scaling by total bigrams to produce a firm-level political uncertainty index. Quarterly measures are standardized and aggregated to annual values.

Controls: Firm-level controls include size (log assets), tangibility (PPE/assets), leverage (debt/assets), Tobin’s q, cash-to-assets (SLACK), Altman Z-score, loss indicator (LOSS), and firm age (log years since Compustat listing). Macroeconomic controls include log GDP per capita (constant 2010 USD), inflation, and unemployment. Industry fixed effects are included; standard errors are clustered at the firm level.

Empirical specification: The baseline regression relates RISK_1 to firm-level political uncertainty and controls, with and without macro variables. Robustness includes substituting alternative risk-taking measures and assessing moderation by lobbying.

Lobbying moderator: Lobbying data are from the Center for Responsive Politics. Lobbying intensity is lobbying expenditure divided by beginning-of-year market value; LOBBY is an indicator equal to 1 for top-quartile intensity within the industry-year, 0 otherwise. Interaction terms test moderation.

Additional analyses: Cross-sectional splits by firm size (above/below industry median assets), pre- (2002–2007) vs post-crisis (2009–2021) subsamples, and topic-specific political uncertainty (economy/budget, environment, trade, institutions/political process, health care, security/defense, tax, technology/infrastructure).

Endogeneity: A propensity score matching (PSM) approach compares treatment firms (top 30% in firm-level political uncertainty) to controls (bottom 50%), matched on firm characteristics within 2-digit SIC and year, without replacement. The matched sample includes 1,410 treatment and 1,410 control observations (N=2,820; regression N≈3,196 with controls).

• Baseline effect: Firm-level political uncertainty is positively associated with corporate risk-taking. In models with firm controls and industry fixed effects, coefficient ≈ 0.004 (t ≈ 3.60). Including macro controls, coefficient ≈ 0.004 (t ≈ 3.39). A one-standard-deviation increase in firm-level political uncertainty corresponds to a 2.53% increase in risk-taking.
• Controls: Risk-taking is negatively related to size (≈ -0.008; t ≈ -16) and Z-score (≈ -0.005; t ≈ -17), and positively related to Tobin’s q (≈ 0.015; t ≈ 14), cash (SLACK; ≈ 0.060; t ≈ 10), loss indicator (≈ 0.006; t ≈ 4), and age (≈ 0.003; t ≈ 2.5).
• Robustness across risk measures: Positive association holds for RISK_2 (≈ 0.013; t ≈ 2.63), RISK_3 (≈ 0.006; t ≈ 2.71), RISK_4 (≈ 0.006; t ≈ 2.45), and RISK_5 (≈ 0.172; t ≈ 2.34).
• Lobbying moderation: The interaction P_UNCERTAINTY × LOBBY is positive and significant (≈ 0.0059; t ≈ 3.82), implying stronger effects among high-lobbying firms.
• Firm size heterogeneity: Effect is stronger for large firms (coefficient ≈ 0.0055; t ≈ 3.45) and insignificant for small firms; the difference in coefficients is statistically significant (p = 0.000).
• Pre/post financial crisis: Effect is present in both periods but slightly stronger after the 2008 financial crisis: pre-2008 coefficient ≈ 0.0035 (t ≈ 2.53) vs post-2008 ≈ 0.0054 (t ≈ 3.31).
• Topic-specific uncertainty: Risk-taking is especially positively associated with firm-level political uncertainty related to economy and budget, institutions and political process, health care, security and defense, tax policy, and technology and infrastructure.
• Endogeneity check (PSM): In the matched sample, firm-level political uncertainty remains positively related to risk-taking (coefficient ≈ 0.009; t ≈ 3.10), indicating about 0.9% higher risk-taking in the treatment group relative to matched controls.

Findings indicate that when managers face greater firm-specific political uncertainty, they tend to take more risk, contrary to much of the macro-level literature that links political uncertainty to caution and reduced investment. One interpretation is that firms respond to uncertainty by intensifying lobbying and cultivating political connections, thereby improving access to policy-relevant information and reducing information asymmetries. This informational advantage can lessen perceived uncertainty for managers and facilitate risk-taking, particularly in larger firms with more resources to lobby and manage political exposure. The positive association persists across multiple risk-taking measures, is reinforced by lobbying intensity, and is somewhat stronger after the 2008 crisis, consistent with increased salience of political risk post-crisis. Topic-level analyses suggest that uncertainty around specific policy areas (e.g., economy/budget, tax, institutions/process, health care, security/defense, technology/infrastructure) is particularly relevant for managerial risk-taking. Overall, results support the view that micro-level political risk exposure and firms’ political strategies materially shape corporate risk behavior.

The paper demonstrates that firm-level political uncertainty is positively associated with corporate risk-taking among U.S. non-financial firms (2002–2021), with the effect amplified in larger firms and in those with higher lobbying intensity. The relationship is robust across alternative risk-taking measures, persists after controlling for firm and macro factors, and remains significant in propensity score–matched samples. The study contributes by: (1) shifting the focus from aggregate to firm-level political risk using the Hassan et al. (2019) text-based measure; (2) reconciling mixed evidence on political uncertainty’s impact by showing that firm-specific exposure can increase risk-taking; and (3) highlighting lobbying as an important moderator and potential channel through which firms manage political risk. Future research could incorporate ex-ante risk-taking measures and extend analysis to non-U.S. settings with different political institutions to assess external validity and mechanisms.

• Risk-taking is measured using ex-post variance of accounting outcomes (e.g., ROA, EBITDA), which may not capture ex-ante managerial risk-taking intentions. Future work could incorporate forward-looking or market-based measures.
• The sample is limited to U.S. listed non-financial firms; results may not generalize to other institutional contexts where political risk and access to political channels differ.
• While PSM and extensive controls mitigate endogeneity concerns, unobserved factors related to both political uncertainty exposure and risk-taking may remain.