Using data on roll-call voting patterns of U.S. state legislators from 1993 to 2016, we find a negative relationship between firm investment and state legislative polarization, measured as the ideological distance between the Democratic and Republican party medians. An increase of one standard deviation in the average within-state polarization leads to a 4.5% reduction in firm investment rates, controlling for growth opportunities and economic conditions. In response to heightened political polarization, firms are more likely to move their corporate headquarters to less polarized states. We find that polarized states have lower passing rates for legislative bills and higher volatility in economic policy, suggesting that legislative gridlock and policy instability may be two possible mechanisms through which polarization affects firm decisions. Our paper provides new insights into the real effects of political polarization.

We present a model in which firms compete for workers with a taste for a nonpecuniary job attribute, such as purpose, sustainability, ES/CSR, or working conditions. Some firms acquire flexible production technologies, which allow them to offer jobs with different levels of the desirable job attribute. In a competitive assignment equilibrium, flexible firms become polarized and cater to workers with extreme preferences for the job attribute. Firm polarization increases with technological progress and industry concentration. More polarized sectors have higher profits, lower average wages, and a lower labor share of value added. Traditional investors prefer to buy shares in polarized sectors, while socially responsible investors prefer to invest in less polarized sectors. Firms in more polarized sectors are more valuable and have higher stock returns than firms in less polarized sectors.

We develop a novel measure of partisan corporate speech using techniques from natural language processing. Using all tweets sent by companies in the S&P 500, we document a large increase in the amount of partisan corporate speech between 2011 and 2022. From 2019 onwards, this increase is disproportionately driven by companies using more Democratic-sounding speech. Additional tests suggest the recent growth in sustainable investing may have contributed to the surge in Democratic speech. Stock returns are close to zero around the average partisan tweet, but exhibit substantial heterogeneity by degree of stakeholder alignment.