Foreign Risk, Domestic Problem: Capital Allocation and Firm Performance Under Political Instability

• 成果类型: Article
• 署名作者: Col, Burcin; Durnev, Art; Molchanov, Alexander
• 署名单位: Pace University; University of Iowa; Massey University
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2016.2638
• 发表日期: 2018
• 页码: 2102-2125
• 关键词: political instability; foreign operations; investment efficiency

摘要

We argue in this paper that firms with foreign operations misallocate capital and underperform when they face political instability abroad. We develop and test a dynamic model of firm capital allocation under foreign political instability. The model shows that as a political regime becomes less stable, independent of whether the regime becomes less business-friendly or more business-friendly, firms invest suboptimally (i.e., they either overinvest or underinvest), and their marginal q's diverge further from an optimal level. Using elections and textual analysis of local media during national elections, we construct a novel index of political instability. We find that U.S. firms and industries with a greater exposure to election-induced political instability experience disruptions of investment efficiency that lead to lower valuations and lower total factor productivity. Therefore, international trade is a significant conduit of foreign political instability into U.S. markets.