How does firm exit during geopolitical conflicts affect idiosyncratic risk? Evidence from the Russia–Ukraine war

While it is well understood that geopolitical conflicts like the Russia–Ukraine war should have a significant impact on firm risk, it is less clear how firm exit during such conflicts may affect firm-specific, idiosyncratic risk. We address this question empirically by investigating the exit decisions of U.S. firms triggered by the Russian invasion of Ukraine in February 2022. Specifically, we identify firms that announced their exits from Russia in February-May 2022 (treated firms) and adopt a difference-in-differences (DiD) approach to compare the changes in idiosyncratic risk between these treated firms and matched control firms that did not make exit announcements. Our DiD results indicate that compared to matched control firms, treated firms have lower idiosyncratic risk after announcing their exit decisions, especially when the exit decisions involve full withdrawal of operations rather than only suspending or scaling back operations. Our results also indicate that the decline in idiosyncratic risk is more pronounced for firms with efficient and geographically diversified supply chains. Additional tests further suggest that supplier geographic diversification plays a more important moderating role than customer geographic diversification. These findings demonstrate the effectiveness of firm exit strategies in mitigating idiosyncratic risk during geopolitical crises but also reveal the key role played by efficient and diversified supply chains in shaping this outcome.