Political Shock and Firm Performance: Evidence from Telecommunications License Cancellations in India

Abstract: Although a firm’s political environment impacts strategy and performance, existing research has given little consideration to how changes in the political environment impact firms. We argue that following a political shock – or an unexpected and significant change in the political environment – the operational performance of the firm declines. Responding to the shock can be managerially costly; firms divert significant managerial resources from routine operations to responding to the political challenge. As finite managerial resources are spread over a greater number of novel and challenging political activities, rather than core productive activities, firm performance on operational parameters suffers. Further, if there is a decline in managerial resources devoted to oversight of assets that are centrally managed but utilized across multiple locations, we expect to observe the negative effect on operational parameters in all locations that share common assets, even if those locations are not directly affected by the political shock. Using a natural experiment and a difference-in-differences approach, we find support for our arguments in the context of telecommunications firms in India.