Partisan conflict, political insurance, and corporate bankruptcy risk

Siyu Chen

 Co-Presenters: Siyu Chen, Jiarui Chen
College: College of Business and Public Management
Major: Finance
Faculty Research Mentor: Ahmed Alam
 

Abstract:

This paper examines the interlinkage among U.S. partisan conflict, political connection, and corporate bankruptcy risk. Based on a sample of 6,229 U.S. firms over 23 years, high partisan conflict significantly raises corporate propensity to be bankrupt. This effect is robust to using alternative definitions of bankruptcy, controlling for national and state-level economic policy uncertainties, and excluding financial crises and presidential and gubernatorial election years. Moreover, the outcome is more pronounced for small and medium firms and valid for firms operating in industries with high cash flow volatility. Firms strengthening their political connections can reduce such risks, supporting our political insurance hypothesis. Political insurance is most important during periods of very high partisan conflicts, persists in the long run, and survives a set of matched samples generated through propensity score matching estimation, addressing possible selection bias. Additional analyses suggest that capital investments, operating cash flows, and profitability are potential channels through which political connectivity helps firms mitigate high financial risk amidst escalated political polarization.