Subsidies as stabilizers: firm-specific risk and political uncertainty

The authors examine the effect of government subsidies on firm-specific risk in a panel of US firms. Both the receipt and magnitude of subsidies significantly reduce idiosyncratic volatility, measured using residuals from the Fama–French three- and five-factor models. To capture heterogeneity, the authors draw on political risk measures from Hassan et al. (2019) and find that firms with heightened political exposure experience the strongest stabilizing effects. Using fixed effects, two-stage least squares regressions, difference-in-differences, nearest neighbor matching and correlated random effects, the authors find consistent evidence that subsidies mitigate rather than amplify firm-specific risk. The results underscore the stabilizing role of public interventions in reducing firm-level vulnerabilities and promoting corporate stability.