Hedging on the Hill: Political Hedging and Firm Risk

We examine whether firms’ political hedging activities are effective at mitigating political risk. Focusing on the risk induced by partisan politics, we measure political hedging as the degree to which firms’ political connections are balanced across Republican and Democratic candidates. We find that greater political hedging is associated with reduced stock return volatility, particularly during periods of higher policy uncertainty. Similarly, greater political hedging is associated with reduced crash risk, investment volatility, and earnings volatility. Moreover, the reduction in earnings volatility appears to relate to both a firm’s taxes and its operating activities, as we find that greater political hedging is associated with reduced cash effective tax rate volatility and pretax income volatility. We further find investors are better able to anticipate future earnings for firms that engage in political hedging, suggesting that political hedging helps improve firms’ information environments. Lastly, we perform an event study using President Obama’s Clean Power Plan. We find that on the days this policy proposal was debated in Congress, energy and utility firms experienced heightened intraday return volatility (relative to other firms and nonevent days). However, this heightened volatility is mitigated for energy and utility firms that are more politically hedged. Overall, we conclude that political hedging is an effective risk management tool that helps mitigate firm risk.

The final published version can be found at https://doi.org/10.1287/mnsc.2021.4050



Work Title Hedging on the Hill: Political Hedging and Firm Risk
Open Access
  1. Dane M. Christensen
  2. Hengda Jin
  3. Suhas A. Sridharan
  4. Laura A. Wellman
License In Copyright (Rights Reserved)
Work Type Article
  1. Institute for Operations Research and the Management Sciences (INFORMS)
Publication Date November 22, 2021
Publisher Identifier (DOI)
  1. 10.1287/mnsc.2021.4050
  1. Management Science
Deposited April 07, 2022




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Work History

Version 1

  • Created
  • Added MS-ACC-20-00829.R2_Proof_fl-1.pdf
  • Added Creator Dane M. Christensen
  • Added Creator Hengda Jin
  • Added Creator Suhas A. Sridharan
  • Added Creator Laura A. Wellman
  • Published