Stra­tegic Real­loc­a­tion: Cor­por­ate re­sponses to cam­paign fin­ance re­form

Abstract: 
How does political risk affect firm behavior? The literature suggests several possible firm responses to political risk. We use the 2015 Supreme Court decision in Brazil as a shock to the political environment that firms operate in. The decision banned corporate contributions and generated uncertainty about the political influence of firms in the future. We use this event to examine how firms adjust their strategies when a key channel of political influence is removed, focusing on changes to firm ownership structures and investment strategies. Our evidence suggests that the court decision generated ownership change, as international owners and domestic owners with more influence took control of firms, but we find no evidence that firms invest more in mobile assets in the years following the court decision. To capture more immediate and subtle strategic responses by firms, we complement these results with a text analysis of earnings call transcripts. We document a post-reform increase in action-oriented language in the calls, indicating that firms more actively discuss potential strategic adjustments related to ownership and mobility, even when these are not yet reflected in observed outcomes. Our evidence speaks to the large literature on firm strategies for political risk mitigation. The findings corroborate arguments about how the loss of political influence can induce ownership changes. They also highlight that adjustments in asset mobility are slower to materialize, even as firms begin to articulate such strategies in their communications.

Short Bio: 
Timm Betz is an Associate Professor at Washington University in St. Louis. He also directs the research group PINPOINT, funded by an ERC Starting Grant, at LMU Munich. His research examines political contests among governments, firms, and citizens in the context of global markets, and what role institutions play in these contests.