Corporate Political Activity and Asset Pricing

This study considers the implications of corporate political activity and political risk on asset pricing. It is found that firms which operate an affiliated political action committee (PAC) outperform firms that do not. Among firms that operate a PAC, we find that those that spend relatively less on politics outperform those that spend more and that political risk is successfully hedged by firms that are relatively more politically active than their peers. The difference in performance is largely (but not entirely) explained by exposure to systematic political risk, and there is a component to systematic political risk that is orthogonal to commonly considered risk factors. ∗Myers is a PhD student at the UCLA Anderson School of Management. I would like to thank Antonio Bernardo, Francis Longstaff, Walter Torus, and Rossen Valkanov for helpful comments and feedback, as well as my fellow students for helpful discussions and insight; in particular Juhani Linnainmaa, Udi Peleg, Alessio Saretto, and Yuzhao Zhang. I welcome any and all comments at [email protected]. All errors are my responsibility.