How Political Winds Shape Growth Horizons: Firm‐Level Political Risk and Equity Duration

ABSTRACT This study examines the pivotal role of firm‐level political risk in affecting firm‐level equity duration, revealing a significant and negative impact. By building a theoretical model, we propose that firm‐level equity duration is intrinsically tied to the price‐dividend ratio and is influenced by political risk through the cash flow channel. In additional analysis, we further show that political risk is associated with lower firm value through the equity‐duration channel. To ensure robustness, we implement a range of additional tests, including a placebo test, instrumental variable analysis, propensity score matching, and alternative measures of key variables. The findings indicate that the relationship between firm‐level political risk and equity duration remains unaffected by the aggregate economic policy uncertainty (EPU) level. Notably, periods of Democratic leadership appear to mitigate the negative effects of political risk on equity duration. Additionally, the study documents that firm lobbying activities and institutional investor ownership are effective in counteracting the negative impacts of firm‐level political risk on equity duration.