In an era of increasing political salience, firm-level political risk, including policy uncertainty, regulatory threats and partisan favoritism has a significant effect on asset pricing, capital structure and investment decisions. Path-breaking research by scholars attests to these effects—yet they treat risk as exogenous, ignoring its responsiveness to changes in party identification(s). We fill this gap by looking at risk changing endogenously when firms enter and exit U.S. politicians’ stock portfolios, using lawmakers’ trades as natural experiments both in the formation of alliances and their subsequent dissolution.

In our analysis, we rely on granular transaction-level openness from congressional traders as well as common firm fundamentals and known measures of political risk. This results in a monitoring of events at firm-level frequency from open diary data, recording both entry (new positions or increases) and exit (reductions or complete disposals) for public firms. We leverage intra-firm variation before and after events, as initiations or increases represent an endorsement (e.g., increased visibility to committees), while reductions or sales serve as severed connections (e.g., divestitures post-scandals).

We contribute to political finance by bridging ownership and risk channels systematically, thus deepening studies of congressional trading benefits and crony capitalism. Robustness to alternative specifications indicates one's ability to be applied to a broader set of contexts. Implications protect investors from this type of policy-induced volatility, assist regulators in deciding how to craft disclosure laws such as the STOCK Act, and guide researchers on how to structurally represent endogenous policy uncertainty within an asset pricing framework.