Two essays in corporate finance
This dissertation investigates the impact of political factors on firm corporate policies. In the first essay, I investigate whether political uncertainty affects firm innovation, using United States gubernatorial elections as a source of plausibly exogenous variation in uncertainty. I find that firm innovation productivity, captured by patent counts and citations, declines 3.8% and 5.5% respectively in the year leading up to an election and quickly reverses afterward. This finding is robust to various specifications and endogeneity concerns. Incumbent Republican regime is negatively associated with innovation, and the negative effect of political uncertainty on innovation only exists in elections where the incumbent governor is a Republican. Finally, I find that the uncertainty effect is more pronounced in elections with high levels of uncertainty, in politically sensitive and non-regulated industries, and in firms subject to less binding financing constraints.
The second essay (jointly with Jerry Cao, Brandon Julio and Sili Zhou) examines the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are selected and promoted in China. The tournament-style promotion system creates incentives for new provincial governors to exert their influence over capital allocation, particularly during the early years of their term. Using a neighboring-province difference-in-differences estimation approach, we find that there is a divergence in investment rates between state owned enterprises (SOEs) and non-state owned enterprises (non-SOEs) following political turnover. SOEs experience an abnormal increase in investment by 6.0% in the year following the turnover, consistent with the incentives of a new governor to stimulate investment. In contrast, investment rates for non-SOEs decline significantly postturnover, suggesting that the political influence exerted over SOEs crowds out private investment. The effects of political turnover on investment are mainly driven by normal turnovers, and turnovers with less-educated or local-born successors. Finally, we provide evidence that the political incentives around the turnover of provincial governors represent a misallocation of capital as measures of investment efficiency decline post-turnover.