Energy security risk and firm value: Does political connectivity matter?

Principal Investigator:
Haijie Xu

Co-PIs:
Haoran Wu

Faculty Advisor:
Ahmed Alam

Abstract:
We undertake a novel empirical study to investigate the interlinkage between energy security risk, political connection, and firm value. We hypothesize that firms suffer from value erosion during cycles of energy insecurity. We further predict that political connectivity may mitigate this loss as investors often perceive politically affiliated firms to be insured against such adverse macroeconomic phenomena. To conduct our empirical analysis, we utilize a sample of 320 firms from the U.S. energy sector over the years from 1996 to 2018. Based on multivariate fixed effects regression models, the results indicate that energy insecurity significantly impedes firm value. The effect is mainly attributed to small- and medium-sized firms, as well as to firms with pre-existing high valuations. Further exploration reveals that political connection eases the value reduction, corroborating the political insurance hypothesis. Firms with larger political spending, in the form of campaign contribution and lobbying, are perceived as more valuable by the market. The political insurance survives after employing a propensity scores matching technique to address the issue of endogeneity.