THE IMPACT OF POLITICAL RISK AND LOBBYING ON THE COST OF EQUITY CAPITAL

Abstract

We research how political risk impact the cost of equity capital for individual firms. Using a new measure for political risk we are able to investigate this on a firm level. We hypothesize and find that there is a positive relationship between political risk and the cost of equity capital. We also investigate which tools there are to mitigate this risk. We examine how lobbying expenditures impact the cost of equity capital, as well as if lobbying could mitigate the impact of political risk. We find a negative relationship between lobbying expenditures and the cost of equity capital. We do not find that that lobbying expenditures mitigate the impact of political risk on the cost of equity capital. However, after performing a sub-sample analysis, we do find a mitigating effect of lobbying on political risk.