Political institutions and corporate risk-taking: International evidence

Abstract

Tapping into firm-level accounting data across 90 countries over a 26-year period, we find that sound political institutions are positively associated with corporate risk-taking. This result is economically significant, robust to alternative proxies for corporate risk-taking and political institutions, and continues to hold after mitigating endogeneity concerns of political institutions. We also collect evidence that sound political institutions may compensate for weak legal institutions in inducing corporate risk-taking. We argue that sound political institutions improve the investment environment for firms and can induce higher levels of corporate risk-taking, which is ultimately associated with economic growth.