Firm-Level Political Risk and Corporate Innovation

Abstract

This study finds a negative association between firm-level political risk (PRISK) and firm-level patents and citations in general. The PRISK extracted from different sectors also shows similar effects. This impact is more pronounced when a firm belongs to economically uncertain states, politically corrupted regions, and competitive industries. Besides, we identify that increasing cost of capital is a transmission channel that surges the negative impact of PRISK on corporate innovations. We also find the robust negative impact of PRISK on innovation when firms mainly rely on external finances. Our findings have policy implications for the firm’s manager, market participants, and practitioners.