This paper studies the mediating role that political connections play in the relationship between cost of equity and political risk (i.e., partisan political conflict and economic policy uncertainty). The key channel is the information advantage firms achieve from connections to politicians. I show that, in the face of rising economic policy uncertainty, the financial reports of firms with strong political connections exhibit less-uncertain language than non-connected peers, consistent with superior information enabling connected firms to hedge against policy uncertainty. Consequently, connected firms' cost of equity is less sensitive to rising economic policy uncertainty. However, in the event of extreme partisan political conflict, the possibility of legislative gridlock and resulting loss of information advantage increases the exposure of connected firms. This manifests in heightened uncertainty expressed in financial disclosures and consequently cost of equity. Adding further support to the proposed information channel, these differential effects of partisan conflict and economic policy uncertainty are shown to concentrate in industries where firm success is highly dependent on government spending and policy.

This paper examines the monitoring role of investors in the behavioral spillover between firms with shared auditors. Our context involves firms receiving U.S. Securities and Exchange Commission comment letters on issues relating to the recognition of revenue, gains, or losses (RRGL) in their 10-K filings and subsequently engaging in a higher degree of accounting conservatism. Investors of firms who did not receive a comment letter but share auditors with RRGL comment letter recipients react adversely to the release of these comment letters. Through the threat of downward stock price pressure on the value of Chief Financial Officers' equity compensation, investors induce the nonrecipients to also engage in a higher degree of accounting conservatism. When exposed to higher reputation and litigation risks, the shared auditors further contribute to the behavioral spillover between their clients by acting as informational intermediaries.