Effect Of Political Uncertainty Research Articles

Decoding the impact of political uncertainty on IPO underpricing in China

PurposePolitical factors play a crucial role in China's initial public offering (IPO) market due to its distinctive institutional context (i.e. “economic decentralization” and “political centralization”). Given the significant level of IPO underpricing in China, we examine the impact of local political uncertainty (measured by prefecture-level city official turnover rate) on IPO underpricing.Design/methodology/approachUsing 2,259 IPOs of A-share listed companies from 2001 to 2019, we employ a structural equation model (SEM) to examine the channel (voluntarily lower the issuance price vs aftermarket trading) through which political uncertainty affects IPO underpricing. We check the robustness of the results using bootstrap tests, adopting alternative proxies for political uncertainty and IPO underpricing and employing subsample analysis.FindingsLocal official turnover-induced political uncertainty increases IPO underpricing by IPO firms voluntarily reducing the issuance price rather than by affecting investor sentiment in aftermarket trading. These relations are stronger in firms with pre-IPO political connections. The effect of political uncertainty on IPO underpricing is also contingent upon the industry and the growth phase of an IPO firm, more pronounced in politically sensitive industries and firms listed on the growth enterprise market board.Originality/valueLocal government officials in China usually have a short tenure and Chinese firms witness significantly severe IPO underpricing. By introducing the SEM model in studying China IPO underpricing, this study identifies the channel through which local government official turnover to political uncertainty on IPO underpricing.

How Do Firms Respond to Political Uncertainty? Evidence from U.S. Gubernatorial Elections

ABSTRACTWe examine the joint response to political uncertainty along two margins: changes in real activity and voluntary disclosure. We focus on within‐firm variation in exposure to ex ante competitive U.S. gubernatorial elections using data on preelection poll margins and firms’ state exposures. Despite real activity falling in the years leading up to a close election, we find that voluntary disclosure increases both in frequency and content, including mentions of risk in filings that reference states holding elections. Our tests use a decomposition of 8‐K filings into real activity and voluntary disclosure to address the endogenous complementarity between these two responses. These results hold when using alternative ex ante measures of political uncertainty based on term‐limited incumbents, historically competitive offices, or state legislature gridlock. Both effects of political uncertainty are stronger for firms in highly regulated industries and weaker for those least exposed to the local market, linking the real activity and disclosure responses to uncertainty.

Collusion, political connection, and tax avoidance in China

AbstractOur paper is the first to examine the impact of government‐firm collusion on firm tax avoidance in China by applying an instrumental variable approach. We take political turnover of local leaders as an external shock to the existing collusion and investigate firms' tax avoidance activities during local leadership transition. By using data on political turnover of prefectural leaders and listed firms from 2007 to 2014, we find that political turnover leads to the instability of existing collusion, and consequently a decrease in firm tax avoidance. This provides evidence of the pre‐existing collusion between government and firms. We then rule out the possibility that such change is driven by the effect of political uncertainty or tax competition by considering the heterogeneous effect of firms and cities. Finally, we show that firms' political connections, captured by political ties and ownership of firms, stabilize the existing collusion and help firms maintain their advantage while facing external political shocks.

Political uncertainty and institutional herding

Political uncertainty is a key determinant of investment decisions. Specifically, the uncertainty that surrounds government policy makes beliefs noisier and depresses stock prices. In this paper, we explore whether institutional investors herd, i.e., mimic each other's trades, in response to political uncertainty. Using U.S. institutional investors' quarterly holding data from 1985 through 2019, we find evidence consistent with our conjecture. We also find that the results are stronger in times of low presidential popularity, and among companies that are politically sensitive. Overall, the findings suggest that the effect of political uncertainty on financial markets is larger than previously thought.

Economic policy uncertainty and cross-border lending

Banks increase cross-border syndicated lending when domestic economic policy uncertainty is high, after controlling for credit demand at the borrower country or country-industry levels. The credit migration effects are strongest for banks with diverse income and when banks face fiercer competition. Using elections as a source of plausibly exogenous variation which positively affects political uncertainty, we provide causal evidence on the effects of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.

Political uncertainty and the US market risk premium

PurposeThe purpose of this study is to examine the bi-directional causality between political uncertainty and the market risk premium in the US.Design/methodology/approachI use a theoretical model to motivate signs and then check signs based on a vector autoregression.FindingsI find that political uncertainty has a small positive, delayed effect on the market risk premium. The market risk premium, on the other hand, has a large permanent, negative effect on political uncertainty.Originality/valueThis is the first research paper to consider the bi-directional effects of political uncertainty on the market risk premium and vice versa. It also finds interesting empirical results.

Effects of Exchange Rate Shocks and Political Risk on the Turkish Manufacturing Industry: Some Evidence

In cases where debt dollarization of firms is more than asset dollarization, sudden and high depreciation of the national currency causes firms to lose net wealth and may adversely affect their investments and profitability. Real exchange rate depreciation, on one hand, increases the incomes of manufacturing industry firms by providing international competitive advantage and it can prevent the competitive advantage by creating negative balance sheet effect due to high debt dollarization on the other. In this context, the aim of this study is to discuss the determinants of the debt-dollarization and the balance sheet situation of the manufacturing industry, which is facing political instability and exchange rate volatility. Dynamic panel data method was used for manufacturing industry sub-sector data for the 2008-2015 period. Overall, our empirical results reveal that the exchange rate shocks have positive impact on both debt dollarization and profitability. That means there is an exchange rate dependency in manufacturing industry. In addition, results show that there is no significant effect of political uncertainty on debt dollarization and the profitability of firm.

Economic Policy Uncertainty and Cross-Border Lending

During times of high economic policy uncertainty, domestic banks increase cross- border syndicated lending. We control for credit demand by including time-varying borrower country fixed effects in our regressions. The credit migration effects are strongest for banks with diverse income, and when banks face fiercer competition, either in the domestic banking sector or from the bond market. Additionally, using elections as a source of plausibly exogenous variation, which positively affects political uncertainty, we provide causal evidence on the effect of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.

Electoral Uncertainty, Macro-Economic Environment and Corporate Investment Strategy

Our study looks at the relationship between firm’s investment spending in fixed and intangible assets and electoral uncertainty around two types of national elections: presidential and parliamentary elections. We analyze investment sensitivity to electoral uncertainty from 1996 through 2017 using a sample of 1485 firms from 45 countries. We find that, regardless election type, firm’s fixed investment significantly decrease around elections. Precisely, firms hold investment spending in before elections and restart the year following year. In this case, firms adopt a wait-and-see strategy. But, in the context of corruption control the potential negative effects are reduced. We thus highlight how different types of investments respond to various electoral shocks since microeconomic processes respond to policy uncertainty based upon firm’s resource needs. We conclude that the effect of political uncertainty on business investment depend on the degree of political uncertainty and the investment to be undertaken.

Manifestations of Political Uncertainty around US Presidential Elections: Cross-Sectional Evidence from the Option Market

This study examines the effects of political uncertainty around US presidential elections on firm risk, expected return, trading activity, and dispersion of investor beliefs. To this end, we utilize information embedded in short-term options and exploit cross-sectional differences in firms' political features, such as their sensitivity to economic policy uncertainty, their stock returns' exposure to the presidential party, their geographical political alignment with the presidential party, and their political connectedness through campaign contributions. In addition to significant aggregate effects across firms due to political uncertainty, we find that sensitive, exposed, and aligned firms exhibit a substantially higher degree of option-implied price and tail risk, command a higher premium, and feature an increased dispersion of investor beliefs around the presidential election day.

Political Uncertainty and Firm Investment: New Evidence from Chinese Listed Firms

Using hand-collected data on the turnover of mayor and party secretary in 260 Chinese cities, we study the effect of political uncertainty on firm investment. We find that political uncertainty has a negative impact on firm investment. Our baseline results show that firm investment declines when political leader is replaced and the effect of party secretary turnover on firm investment is stronger than that of mayor turnover. Our empirical analysis also demonstrates that: a) the frequency of political turnover is positively associated with the volatility of firm investment; b) state-owned firms significantly reduce investment when party secretary is replaced; c) firms invest less if the replacement of government officials is due to corruption. Lastly, our empirical results are robust to FE estimators and the exclusion of some influential observations.

Firm-level political risk and asymmetric volatility

This paper examines whether proxies of political risk exposure at the firm-level can predict the aggregate stock market volatility. Utilizing a nonparametric causality-in-quantiles test which not only guards against misspecification due to nonlinearity, but also tests for causality over the entire conditional distribution of the realized volatilities, we show that political risk exposure can serve as a strong predictor of bad realized volatility, while the causal effects are non-existent in the case of overall and good realized volatilities. Our findings provide novel insight to the well-documented asymmetric volatility puzzle and the effect of political uncertainty on stock market fluctuations via the investor attention channel. The results also suggest that political risk exposure could be a contributing factor to jump risk in the cross-section of returns.

Political Uncertainty and Cross-Border Acquisitions*

Using national elections as sources of exogenous variation in uncertainty, we show that political uncertainty affects the volume and outcome of cross-border acquisitions. When a country is about to hold a national election, this deters foreign firms’ inbound acquisitions, especially when the host country poses greater expropriation risk. An upcoming home country election encourages firms to conduct outbound cross-border acquisitions, especially to target countries with free-trade agreements, military allies, or countries with better governance. At transaction level, we show that announcement returns to cross-border deals incorporate political uncertainty considerations. Overall, these results shed light on the effects of political uncertainty through the cross-border acquisition channel.

Policy Uncertainty and Household Stock Market Participation

Using micro-level panel data and a difference-in-differences identification strategy, we study the effect of political uncertainty on household stock market participation. We find that households significantly reduce their participation and reallocate funds to safer assets during periods of increased political uncertainty prior to gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election reduction in participation is only partially reversed.

Political Uncertainty and Innovation: The Causal Effect of National Leaders on Patent Applications

We analyze the role of heads of state and the effects of political uncertainty on innovation, as measured by growth in patent applications. Utilizing real options reasoning we argue that patents co...

Political Uncertainty and Corporate Investment: State-Level Evidence from Australia

We show that political uncertainty influences corporate investment at the Australian state-level. More specifically, we find that the political party that holds power and replacement of the State Premier are the most important and robust determinants of corporate investment. We also show that political uncertainty affects corporate investment of firms differently depending on their firm characteristics. The effect of political uncertainty is more pronounced, for instance, on firms that are politically non-connected, large in size, more capital intensive, and characterized by greater bargaining power.

Mitigating Political Uncertainty

This study examines whether firms that establish political connections gain differential access to relevant information over legislative developments, thereby mitigating the negative consequences of uncertainty. I investigate this hypothesis in the context of firm-specific investment, where prior literature has documented a negative relation between investment and uncertainty. Consistent with my hypothesis, I find that political connections (partially) offset the negative effect of political uncertainty on investment, controlling for determinants of investment, general macroeconomic conditions, and industry and time-period fixed effects. My results do not appear to be driven by connected firms pursuing investments that are insensitive to political uncertainty (i.e., highly reversible projects). My second hypothesis predicts and finds that the benefits of targeting political contributions at policymakers with aligned policy preferences produces the greatest benefits for connected firms. Finally, to help rule out the possibility that a correlated omitted variable is driving my primary findings, I perform three additional sets of analyses. First, I identify a setting around a specific policy development designed to provide new investment incentives to firms. In this setting, I predict and find that reduced information asymmetry for connected firms results in delaying investment in anticipation of future lucrative tax incentives. Second, I perform a falsification test and document that political connections do not mitigate the effects of general economic uncertainty. Finally, I find that my results are not sensitive to including additional controls for the determinants of political participation. Relying on determinants of investment and political participation, I also construct a propensity score matched sample and continue to find support for my hypothesis within the matched sample.

The Economic Effects of Electoral Uncertainty: An Analysis of a Direct Measure of Uncertainty in Business' Economic Expectations During Pre- and Post-Election Periods in Germany, 1975-2000

This paper - posted here as written for and presented at presentation at the 13th International Conference of Europeanists of the Council for European Studies at Palmer House, Chicago, 14-16 March 2002 - develops and tests a set of hypotheses about the effect of political uncertainty during pre- and post-election periods on the certitude with which respondents to business surveys hold their expectations about the business situation in a given country in the near future. Based on the technique for quantification of qualitative business survey responses developed by Gratz, Knobl, Carlson, and Parkin, I propose a way of measuring expectations uncertainty directly. Applying this method to survey data about the expected business situation from the ifo Konjunkturtest for Germany, I operationalize and test the argument for the German federal elections from 1976 to 1998. The hypotheses are broadly confirmed for 1976, 1980, 1983, and 1994; and partly confirmed for 1987, 1990, and 1998. Where the data seem to disconfirm the hypotheses, various aspects of the particular political context can explain this divergence, though such factors are outside the simple model presented here. The research presented in this paper is part of a larger project, my PhD dissertation, which investigates the influence of political factors on business confidence in advanced capitalist democracies. It seeks to systematize, theorize, and empirically test effects that are frequently assumed or treated anecdotally in the literature on international and comparative political economy.

Political Uncertainty and Cross-Border Acquisitions

We study the relation between political uncertainty and cross-border acquisitions using national elections as sources of variation in uncertainty. We find that political uncertainty affects the volume, deal structure, and outcome of cross-border acquisitions. Elections in acquirer country encourage firms to acquire targets abroad while elections in target countries deter foreign firms’ inbound acquisitions. At the transaction level, we show that the merging firms adjust termination fee, means of payment, and stakes sought-after prior to elections, consistent with the hypothesis firms mitigate potential risks due to political uncertainty. Overall, the results shed new light on the effects of political uncertainty by providing evidence through the cross-border acquisition channel.

The effect of political uncertainty on the cost of corporate debt

In this paper we bring new empirical evidence that political uncertainty is associated with higher corporate debt financing costs. Controlling for all bond and firm characteristics that could affect a firm's cost of debt financing, the uncertainty associated with the outcome of U.S. presidential elections leads to a 34 basis point increase in corporate bond spreads, with closer campaign years associated with additional costs. Similar results hold when we use the continuous measure of the Political Uncertainty Index by Baker et al. (2012). The uncertainty associated with gubernatorial elections, on the other hand, has no effect on the pricing of corporate bonds.