The stock return effect of political risk event on foreign joint ventures: evidence from the Tiananmen Square Incident

Abstract

This study examines how political risk events affect the value of foreign investing firms. A unique event, the Tiananmen Square Incident, is selected to examine this issue because we believe this incident exacerbated the political risk of doing business in China. We examine the impact of the incident on the stock returns of U.S. firms with joint ventures in China. The results show that this incident indeed had a significant impact on U.S. firms with joint ventures in China, and the market had reacted to this event in an efficient manner. The results also indicate that the impact of this incident on U.S. firms was relatively small in magnitude. Further, the sharp increase of joint ventures after the incident and the significant results in high-risk group vs. the insignificant results in low-risk group provide evidence suggesting that the effect of this incident was temporary rather than long-term and regional rather than national.