Skip to main content
×
×
Home

Local Political Uncertainty, Family Control, and Investment Behavior

  • Mario Daniele Amore and Alessandro Minichilli
Abstract

Estimating difference-in-differences models on a comprehensive data set of Italian companies, we provide novel insights into the literature on political uncertainty and firm investment. We first establish that local political uncertainty leads to declining investment. Next, we show that family control neutralizes this effect: Family firms are more likely than other firms to invest during politically uncertain times, especially when operating in industries dependent on public spending and/or managed by family members. Finally, we document that this investment resilience of family firms under political uncertainty translates into significantly greater profitability and growth.

Copyright
Corresponding author
*Amore, mario.amore@unibocconi.it, Bocconi University; Minichilli, alessandro.minichilli@unibocconi.it, Bocconi University Invernizzi Center for Research on Innovation, Organization, Strategy and Entrepreneurship (ICRIOS) and SDA Bocconi School of Management.
Footnotes
Hide All
1

We thank an anonymous referee, Pat Akey, Mircea Epure, Paul Malatesta (the editor), Alexei Ovtchinnikov, Andrea Polo, Sebastian Schwenen, Carlos Serrano, and Michael Kurschilgen, as well as participants at the 2016 Financial Management Association Conference, the 2016 International Finance and Banking Society Conference, and seminar participants at the University of Edinburgh, Universitat Pompeu Fabra, and Technische Universität München for useful comments and suggestions. We also thank Fabio Quarato for data support. All errors remain our own.

Footnotes
References
Hide All
Akey, P., and Lewellen, S.. “Policy Uncertainty, Political Capital, and Firm Risk-Taking.” Working Paper, University of Toronto (2016).
Alesina, A., and Perotti, R.. “Income Distribution, Political Instability, and Investment.” European Economic Review, 40 (1996), 12031228.
Amore, M. D., and Bennedsen, M.. “The Value of Local Political Connections in a Low-Corruption Environment.” Journal of Financial Economics, 213 (2013), 387402.
Amore, M. D.; Garofalo, O.; and Minichilli, A.. “Gender Interactions within the Family Firm.” Management Science, 60 (2014), 10831097.
Amore, M. D.; Minichilli, A.; and Corbetta, G.. “How Do Managerial Successions Shape Corporate Financial Policies in Family Firms?Journal of Corporate Finance, 17 (2011), 10161027.
Anderson, R.; Mansi, S.; and Reeb, D.. “Founding Family Ownership and the Agency Cost of Debt.” Journal of Financial Economics, 68 (2003), 263285.
Anderson, R.; Mansi, S.; and Reeb, D.. “Investment Policy in Family Controlled Firms.” Journal of Banking and Finance, 36 (2012), 17441758.
Anderson, R., and Reeb, D.. “Founding-Family Ownership and Firm Performance: Evidence from the S&P 500.” Journal of Finance, 58 (2003), 13011328.
Asker, J.; Farre-Mensa, J.; and Ljungqvist, A.. “Corporate Investment and Stock Market Listing: A Puzzle?Review of Financial Studies, 28 (2015), 342390.
Atanassov, J.; Julio, B.; and Leng, T.. “The Bright Side of Political Uncertainty: The Case of R&D.” Working Paper, University of Nebraska (2016).
Baker, S., and Bloom, S.. “Does Uncertainty Reduce Growth? Using Natural Disasters as Natural Experiments.” Working Paper, Stanford University (2013).
Baker, S.; Bloom, N.; and Davis, S. J.. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics, 131 (2016), 15931636.
Barro, R.Economic Growth in a Cross Section of Countries.” Quarterly Journal of Economics, 106 (1991), 407443.
Belo, F.; Gala, V.; and Li, J.. “Government Spending, Political Cycles, and the Cross Section of Stock Returns.” Journal of Financial Economics, 107 (2013), 305324.
Bennedsen, M.; Huang, S.; Wagner, H.; and Zeume, S.. “Family Firms and Labor Market Regulation.” Working Paper, INSEAD (2015).
Bennedsen, M.; Nielsen, K. M.; Pérez-González, F.; and Wolfenzon, D.. “Inside the Family Firm: The Role of Families in Succession Decisions and Performance.” Quarterly Journal of Economics, 118 (2007), 11691208.
Bernanke, B.Irreversibility, Uncertainty, and Cyclical Investment.” Quarterly Journal of Economics, 98 (1983), 85106.
Bertrand, M.; Kramarz, F.; Schoar, A.; and Thesmar, D.. “The Cost of Political Connections.” Review of Finance, 22 (2018), 849876.
Bertrand, M., and Schoar, A.. “The Role of Family in Family Firms.” Journal of Economic Perspectives, 20 (2006), 7396.
Bhattacharya, U.; Hsu, P. H.; Tian, X.; and Xu, Y.. “What Affects Innovation More: Policy or Policy Uncertainty?Journal of Financial and Quantitative Analysis, 52 (2017), 18691901.
Bianco, M.; Bontempi, M. E.; Golinelli, R.; and Parigi, G.. “Family Firms’ Investment, Uncertainty and Opacity.” Small Business Economics, 40 (2013), 10351058.
Bloom, N.; Bond, S.; and Van Reenen, J.. “Uncertainty and Investment Dynamics.” Review of Economic Studies, 74 (2007), 391415.
Boutchkova, M.; Doshi, H.; Durnev, A.; and Molchanov, A.. “Precarious Politics and Return Volatility.” Review of Financial Studies, 25 (2012), 11111154.
Brogaard, J., and Detzel, A.. “The Asset Pricing Implications of Government Economic Policy Uncertainty.” Management Science, 61 (2015), 318.
Bunkanwanicha, P.; Fan, J.; and Wiwattanakantang, Y.. “The Value of Marriage to Family Firms.” Journal of Financial and Quantitative Analysis, 48 (2013), 611636.
Carvalho, D.The Real Effects of Government-Owned Banks: Evidence from an Emerging Market.” Journal of Finance, 69 (2014), 577609.
Cingano, F., and Pinotti, P.. “Politicians at Work: The Private Returns and Social Costs of Political Connections.” Journal of the European Economic Association, 11 (2013), 433465.
Colak, G.; Durnev, A.; and Qian, Y.. “Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections.” Journal of Financial and Quantitative Analysis, 53 (2016), 25232564.
Comin, D., and Mulani, S.. “Diverging Trends in Aggregate and Firm Volatility.” Review of Economics and Statistics, 88 (2006), 374383.
Czarnitzki, D., and Toole, A.. “Patent Protection, Market Uncertainty, and R&D Investment.” Review of Economics and Statistics, 93 (2011), 147159.
D’Aurizio, L.; Oliviero, T.; and Romano, L.. “Family Firms, Soft Information and Bank Lending in a Financial Crisis.” Journal of Corporate Finance, 33 (2015), 279292.
Ellul, A.; Pagano, M.; and Panunzi, F.. “Inheritance Law and Investment in Family Firms.” American Economic Review, 100 (2010), 24142450.
Faccio, M., and Lang, L. H.. “The Ultimate Ownership of Western European Corporations.” Journal of Financial Economics, 65 (2002), 365395.
Faccio, M.; Masulis, R.; and McConnell, J.. “Political Connections and Corporate Bailouts.” Journal of Finance, 61 (2006), 25972635.
Faccio, M., and Parsley, D.. “Sudden Deaths: Taking Stock of Geographic Ties.” Journal of Financial and Quantitative Analysis, 44 (2009), 683718.
Fan, J.; Wong, T. J.; and Zhang, T.. “Politically Connected CEOs, Corporate Governance, and Post-IPO Performance of China’s Newly Partially Privatized Firms.” Journal of Financial Economics, 84 (2007), 330357.
Fisman, R.Estimating the Value of Political Connections.” American Economic Review, 91 (2001), 10951102.
Francis, B.; Hasan, I.; and Zhu, Y.. “The Impact of Political Uncertainty on Institutional Ownership.” Working Paper, Rensselaer Polytechnic Institute (2013).
Goldman, E.; Rocholl, J.; and So, J.. “Politically Connected Boards of Directors and the Allocation of Procurement Contracts.” Review of Finance, 17 (2013), 16171648.
Gormley, T., and Matsa, D.. “Common (Errors): How To (and Not To) Control for Unobserved Heterogeneity.” Review of Financial Studies, 27 (2014), 617661.
Grullon, G.; Lyandres, E.; and Zhdanov, A.. “Real Options, Volatility, and Stock Returns.” Journal of Finance, 67 (2012), 14991537.
Guiso, L., and Parigi, G.. “Investment and Demand Uncertainty.” Quarterly Journal of Economics, 114 (1999), 185227.
Gulen, H., and Ion, M.. “Political Uncertainty and Corporate Investment.” Review of Financial Studies, 29 (2016), 523564.
Hermes, N., and Lensink, R.. “Capital Flight and the Uncertainty of Government Policies.” Economics Letters, 71 (2001), 377381.
Hsu, P. H.; Huang, S.; Massa, M.; and Zhang, H.. “The New Lyrics of the Old Folks: The Role of Family Ownership in Corporate Innovation.” Working Paper, University of Hong Kong (2015).
Jens, C.Political Uncertainty and Investment: Causal Evidence from U.S. Gubernatorial Elections.” Journal of Financial Economics, 124 (2017), 563579.
Julio, B., and Yook, Y.. “Political Uncertainty and Corporate Investment Cycles.” Journal of Finance, 67 (2012), 4584.
Julio, B., and Yook, Y.. “Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital.” Journal of International Economics, 103 (2016), 1326.
Kelly, B.; Pastor, L.; and Veronesi, P.. “The Price of Political Uncertainty: Theory and Evidence from the Option Market.” Journal of Finance, 71 (2016), 24712480.
Lagaras, S., and Tsoutsoura, M.. “Family Control and the Cost of Debt: Evidence from the Great Recession.” Working Paper, University of Illinois at Urbana–Champaign (2015).
Lins, K.; Volpin, P.; and Wagner, H.. “Does Family Control Matter? International Evidence from the 2008–2009 Financial Crisis.” Review of Financial Studies, 26 (2013), 25832619.
Liu, W. M., and Ngo, P.. “Elections, Political Competition and Bank Failure.” Journal of Financial Economics, 112 (2014), 251268.
Miller, D.; Minichilli, A.; and Corbetta, G.. “Is Family Leadership Always Beneficial?Strategic Management Journal, 34 (2013), 553571.
Morck, R.; Wolfenzon, D.; and Yeung, B.. “Corporate Governance, Economic Entrenchment, and Growth.” Journal of Economic Literature, 43 (2005), 655720.
Mueller, H., and Philippon, T.. “Family Firms and Labor Relations.” American Economic Journal: Macroeconomics, 3 (2011), 218245.
Mullins, W., and Schoar, A.. “How Do CEOs See Their Role? Management Philosophies and Styles in Family and Non-Family Firms.” Journal of Financial Economics, 119 (2016), 2443.
Nordhaus, W.The Political Business Cycle.” Review of Economic Studies, 42 (1975), 169190.
Ovtchinnikov, A.; Reza, S. W.; and Wu, Y.. “Political Activism and Firm Innovation.” Working Paper, HEC Paris (2015).
Pastor, L., and Veronesi, P.. “Political Uncertainty and Risk Premia.” Journal of Financial Economics, 110 (2013), 520545.
Shi, M., and Svensson, J.. “Political Budget Cycles: Do They Differ across Countries and Why?Journal of Public Economics, 90 (2006), 13671389.
Shleifer, A., and Vishny, R.. “Politicians and Firms.” Quarterly Journal of Economics, 109 (1994), 9951025.
Thesmar, D., and Thoenig, M.. “From Flexibility to Insecurity: How Vertical Separation Amplifies Firm Level Uncertainty.” Journal of the European Economic Association, 5 (2007), 11611202.
Tsoutsoura, M.The Effect of Succession Taxes on Family Firm Investment: Evidence from a Natural Experiment.” Journal of Finance, 70 (2015), 649688.
Villalonga, B., and Amit, R.. “Family Control of Firms and Industries.” Financial Management, 39 (2010), 863904.
Wellman, L.Mitigating Political Uncertainty.” Review of Accounting Studies, 22 (2017), 217250.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed