Political uncertainty and the cost of equity capital

Abstract

We study the impact of political uncertainty on the cost of equity. The change of communist party secretaries every several years in Chinese cities provides a good setting for our analysis. Our results suggest that a firm's cost of equity is higher when facing political uncertainty. In addition, we find that when a firm receives a large amount of government subsidies, the CEO/chairman is politically connected, or when the stock market is a bear market, the adverse effect is stronger. In contrast, after the anti-corruption campaign in 2012 or the city is financially advanced, the adverse impact is less pronounced.