“How does a firm’s bankruptcy affect its regional environment?” is an open empirical question that has received little attention in the literature. We hypothesize that because enterprises provide funds to protect their regional environment, their default risk negatively impacts that environment. We analyze the impact of corporate default risk on environmental deterioration in the international setting to answer this question. Using a firm-level corporate default risk quarterly data from 2013q1 to 2020q4, we find that corporate default risk is positively associated with CO2 emissions and decomposed components. These findings are reliable in low-income and highly uncertain countries but weak in countries having more market competition. We also find that the negative impact of corporate default risk on the environment is more robust in countries with more population density and fewer forest area thresholds. Finally, using the instrumental variable approach, we provide preliminary evidence that firm-level political risk (for US and Canadian firms only) increases corporate default risk, leading to a degrading environment. Our findings are robust to alternative measurements of a firm’s default risk and environmental deterioration. Our research will help environmental authorities to consider corporate default risk as a determinant when formulating environmental-related strategies.

This study investigates how firms respond to restricted access to government information. Specifically, the Stop Trading on Congressional Knowledge (STOCK) Act, which limits the stock trading activities of government officials (hereafter referred to as politicians), reduces the willingness of politicians from federal executive branches to engage with firms. Utilizing this exogenous disruption in private communication, we employ a difference-in-differences approach to demonstrate that firms with significant government customers decrease the frequency of management forecasts more than other firms due to the STOCK Act. This reduction is more pronounced for firms where government sales are crucial to their performance and for those that serve as suppliers and government contractors. Further, the positive impact of the STOCK Act on voluntary disclosures is more significant for firms that ex-ante rely heavily on direct political engagements, as indicated by their discussions of political risk and political contributions, and for those expecting government support, as evidenced by higher competition levels within their industry. Conversely, the STOCK Act does not significantly affect the non-financial disclosures of these firms. Finally, consistent with findings on executive branch officers, our results indicate that congressmen are also involved in corporate communications and are effectively regulated on information exchange by the STOCK Act. Overall, these results justify the powerful supervisory impact of the STOCK Act on the U.S. government and capital market and help to facilitate a new U.S. government information disclosure policy for a fairer investment environment.

We present a novel methodology for constructing portfolios to hedge economic and financial risks arising from climate change. We utilize ChatGPT-4 to identify climate-related conversations during earnings conference calls and connect these time-stamped transcripts with high-frequency stock price data pinpointed to the conversation level. This approach allows us to assess a company’s dynamic exposure to climate change risks by analyzing real-time stock price responses to discussions about climate issues between managers and analysts. Our proposed portfolio, constructed by taking long (short) positions in stocks with positive (negative) market responses to climate conversations, appreciates in value during future periods with negative aggregate climate news shocks. Compared to portfolios constructed using alternative methods, our real-time market response-based portfolios demonstrate superior out-of-sample hedge performance. A key advantage of our approach is its ability to capture time-series and cross-sectional variations in stocks’ rapidly-evolving exposures to climate risk, relying on the timing of when climate-related issues become salient topics that warrant conference call discussions and real-time market responses to such conversations. Additionally, we showcase the versatility of our approach in hedging other types of dynamic risks: namely political risk and pandemic risk.

We examine communication of political connections in corporate China, and show that politically inclined positive words—words in connotation of political sentiment—serve as a distinct and effective signaling device for corporate political connections. Using a large sample of corporate news, we find that news’ political sentiment, instead of orthodox political measures such as occurrences of political nouns and political entities, reflects executives’ political connections for private enterprises, and is related to rent-seeking benefits in government subsidy, tax refund, financing constraints and political risk. Our results demonstrate that political sentiment is an effective way to decode subtle corporate political connections in modern China’s “Mind Politics” environment that infiltrates into private corporations.

From the perspective of corporate labor employment, we examine whether debt pressure on local governments prompts them to shift part of their social responsibilities to local firms. We conduct an analysis on Chinese local government debt (LGD) data and find that when LGD is higher, local firms are less likely to cut labor costs when their sales decrease, indicating greater labor cost stickiness. We attribute this to the responsibility-shifting effect, i.e., with heavier debt burdens, local governments intervene more in corporate labor decisions by restricting employee layoffs. Consistent with this argument, we find that the effect of LGD on labor cost stickiness is more pronounced for state-owned and politically connected firms; in regions with lower marketization levels and government fiscal self-sufficient capacities; and when regional unemployment rates, macroeconomic uncertainty, and political risk are higher. We show that through responsibilityshiftingamid high LGD, local governments benefit from a reduction in social expenditures. However, firms with stickier current labor costs will have lower subsequent productivity and market value, despite local governments reciprocating with more subsidies. Overall, LGD not only adversely impacts firm financing through the crowding-out effect but also erodes firm value through the responsibility-shifting effect.

We examine the determinants and consequences of an important but understudied strategy in managing political risks—firm political alignment (FPA). Using a GPT large language model, we measure FPA as the extent to which firms align their actions and commitments with government agendas as presented in annual reports. Leveraging two political events in China, we find that: 1) as the anti-corruption campaign that started in 2012 and later spread across different provinces serves as a staggered shock that reduces the effectiveness of political ties, firms increase their FPA in response; 2) the extent of FPA largely mitigates the negative market reaction around the announcement of the common prosperity policy in 2021 which heightens policy uncertainty for non-state-owned firms. Overall, our findings provide novel evidence that firms engage in FPA to manage political risk.

We examine communication of political connections in corporate China, and show that politically inclined positive words—words in connotation of political sentiment—serve as a distinct and effective signaling device for corporate political connections. Using a large sample of corporate news, we find that news’ political sentiment, instead of orthodox political measures such as occurrences of political nouns and political entities, reflects executives’ political connections for private enterprises, and is related to rent-seeking benefits in government subsidy, tax refund, financing constraints and political risk. Our results demonstrate that political sentiment is an effective way to decode subtle corporate political connections in modern China’s “Mind Politics” environment that infiltrates into private corporations.

We examine communication of political connections in corporate China, and show that politically inclined positive words—words in connotation of political sentiment—serve as a distinct and effective signaling device for corporate political connections. Using a large sample of corporate news, we find that news’ political sentiment, instead of orthodox political measures such as occurrences of political nouns and political entities, reflects executives’ political connections for private enterprises, and is related to rent-seeking benefits in government subsidy, tax refund, financing constraints and political risk. Our results demonstrate that political sentiment is an effective way to decode subtle corporate political connections in modern China’s “Mind Politics” environment that infiltrates into private corporations.

While previous research has delved into the relationship between political uncertainty and the aggregate cross-border flows of capital, there remains a notable gap in our understanding of how political uncertainty affects firm ownership structure within foreign direct investment (FDI) projects, specifically concerning the intensive margin. In this study, we commence by introducing a stylized model, wherein a risk-averse foreign investor teaming up with a local producer is concerned about the political risk associated with the provision of public goods by the local government. Our analysis demonstrates that the foreign investor, acting as a residual claimant, allocates a greater proportion of revenues to the local partner when local policy conditions are more uncertain. This strategic decision indirectly locks in local government commitment to the international joint venture, thereby mitigating the negative influence of political uncertainty. Subsequently, we test our theoretical framework by employing a unique dataset that encompasses city-level political turnovers and firm-level incentive structures in the context of China. The results unveil robust evidence substantiating that uncertainty arising from local political turnover significantly affects the revenue-sharing agreements between foreign investors and their local partners within the international joint production.

Using political turnovers in mayoral appointments at the prefecture-city level in China, we show that investors in the municipal corporate bond market price their concerns for rising local political uncertainty into bonds and relocate capital toward other corporate bonds issued by local firms. Municipal/non-municipal corporate bond issue spreads increase (decrease) by 8.9 (14) basis points before the expected political turnover of mayors and reverse afterwards. The effect is more prominent for bonds issued in cities with investors who have a strong local preference, suggesting investors switch from MCBs to local non-MCBs in their bond holdings. The pricing effect is also stronger for bonds issued in regions with more developed financial markets and bonds with lower credit ratings. Lastly, bond market participants only price in the political risk induced by the turnovers of politician with direct involvement in local economic activities.