The effect of asset and ownership structure on political risk: Some evidence from Mitterrand's election in France

Abstract

Previous research suggests that political risk varies considerably from firm to firm. Yet few empirical tests of the cross-sectional variation in political risk exist. French assets were massively revalued the day after Mitterrand was elected in 1981, providing a unique opportunity to test for the effect of firm-specific factors on political risk. Although foreign ownership tends to increase political risk, other factors can reduce it. A simple model of political behavior is presented in which politicians value, among other things, economic growth. A foreign firm with significant future growth options is likely to experience less political risk than other foreign firms and, under certain circumstances, less risk than even other domestic firms. Tests of these hypotheses are conducted using data from the French and U.S. capital markets. The results are generally consistent with the hypotheses.