Addressing Risk by Doing Good: Business Responses to Policy Initiatives

• In Event: Beyond Regulation: How States Influence Corporations (Virtual Session)

Abstract

Business corporates are playing inc increasingly important roles in public affairs. Why do some firms respond to policy initiatives and participate in governance actively, while others remain inactive or sometimes resistant? This article highlights firm-level political risk as the primary motivation shaping firms' responses. Business firms are facing potential financial loss due to policy uncertainty and discretionary regulation in a weak institutional environment. Policy initiatives provide business firms political opportunities to increasingly embed in the governance process, which offers firm protection through strengthening their institutional power and political connections. To provide supportive evidence, I investigate listed companies’ responses to China's initiative of Targeted Poverty Alleviation from 2012 to 2019. Empirically, I employ a text-as-data approach and measure firm-level political risk using the share of politics-related conversations in meetings between firm management and investors. The machine-learning model BERT and keywords-assisted topic models help to classify 423,409 disclosed questions and answers and construct indicators for general and topic-specific political risk faced by individual firms. Empirical analysis reveals that firms perceiving a higher level of political risk tend to respond to governments' initiatives more substantially. In particular, political risks increase firms' expenditure for and attention to poverty reduction programs in China. Such effects are mainly driven by political risks related to policy uncertainty and discretionary regulation, while effects of international politics remain limited. I test the causal mechanisms by exploring heterogeneous effects on firms with/without existing political connections and top-down political pressure. Furthermore, I provide evidence that firms' active responses are translated into advantages and protections in the regulation (tax inspections and environmental regulation) and allocation of public resources (land transactions), especially for private enterprises. Various strategies of robust checks are employed to support these findings, including alternative measurement and instrumental variable regressions.

Author

• Shengqiao Lin, University of Texas at Austin