Idiosyncratic Political Risk and Bad News Hoarding

ABSTRACT Managers may respond to greater political risk by suppressing unfavorable news from outsiders to manage investors’ perceptions about firm risk and protect their careers. However, they may also avoid engaging in bad news hoarding activities because exposure to political risk increases firm visibility and attracts greater scrutiny. Using a novel measure of firm‐specific risk, we document that idiosyncratic variation in political risk motivates firms to hide bad news from investors, which manifests in greater stock price crash risk. Exploiting the redrawing of electoral districts as a source of plausibly exogenous variation in firm‐level political risk, we show that our documented relationships are causal. Additional tests indicate that stringent monitoring constrains the opportunistic behavior induced by exposure to political risk, while firms actively pursuing political or ESG strategies are less prone to crashes. Finally, we uncover that the path from firm‐level political risk to crash risk is mediated by real earnings management and corporate disclosure readability.