Abstract
This paper analyzes the link between stock returns of UK firms and changes in the probability of a leave vote implied by bookmakers’ odds in the run-up to the Brexit referendum. We posit that changes in the probability of Brexit could be interpreted as changes in political uncertainty. On average, an increase (a decrease) in the probability of a leave vote, interpreted as an increase (a decrease) in political uncertainty, led to a drop (an increase) in stock prices. Larger and faster-growing firms were more affected while foreign sales and foreign assets had a moderating effect. The effect of foreign sales and assets went beyond the pure currency translation effect and was consistent with international activities acting as a diversification mechanism of domestic risks. This study provides the first evidence on cross-sectional determinants of the political uncertainty exposure of individual companies.
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