The Effect of Political Divide on Profitability and Valuation: Evidence from the Oil and Gas sector

Abstract

This paper focuses on profitability and valuation of firms when the future path of government policy is uncertain.  Specifically, the paper examines whether the economic risk caused by gridlock during periods of divided government influences profitability and valuation of firms that operate in the oil and gas sector. Using U.S. publicly traded oil and gas firms from the Compustat database covering the period 1989 to 2016, the results show that firms are profitable when there is a divided government; however, there is no association between divided government and firm valuation. Large firms tend to be profitable during Republican control and small firms are more profitable when there is a divided government.  In sum, political institutional factors affect the profitability of firms that operate in the oil and gas sector; however, this relation differs across firm size and industry.

Key Words: Political Divide, Profitability, Valuation, Oil and Gas Sector

DOI: 10.7176/RJFA/15-5-06

Publication date: May 30th 2024