Measure Of Political Risk Research Articles

Firm-level political risk and credit markets

We take advantage of a new composite measure of political risk (Hassan et al., 2019) to study the effects of firm-level political risk on private debt markets. First, we use panel data tests and exploit the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that borrowers’ political risk is linked to interest rates set by lenders. Second, we test for the transmission of political risk from lenders to borrowers. We predict and find that lender-level political risk propagates to borrowers through lending relationships. Our analysis allows for endogenous matching between lenders and borrowers and indicates the presence of network effects in diffusing political risk throughout the economy. Finally, we introduce new text-based methods to analyze the distinct sources of political risk to lenders and borrowers and provide textual evidence of the transmission of political risk from lenders to borrowers.

Political uncertainty, corruption, and corporate cash holdings

Exposure to political corruption and political uncertainty separately demands opposing risk management responses: to reduce cash to minimize expropriation and to increase cash to hedge policy risk. We study how local political corruption and political uncertainty interact in their impact on corporate cash holdings within the United States. We find robust evidence that firms located in states with higher corruption scores react to increases in local political uncertainty by increasing cash holdings more than those in less corrupt settings. This behavior suggests that firms in more corrupt settings find it expedient to raise cash to facilitate influence of officials in the face of local political risk. We find further support for this conclusion by showing that politically engaged firms respond to our measure of political risk by increasing cash and increasing spending on campaign contributions. Our findings point to a potential channel through which different jurisdictions experience the entrenchment and persistence of corruption.

Firm-level political risk and corporate innovation: evidence from US listed firms

PurposeThe study examines the association between firm-level political risk and corporate innovation and also this study explores how financial constraint and growth level of a firm influence this association.Design/methodology/approach A sample of 14,140 firm-year observations of the US firms from 2003 to 2020 is used. Unlike prior studies, this study uses a firm-level measure of political risk recently developed by Hassan et al. (2019) and measure innovation by patent and patent citation data and a text-based measure. A regression technique is used for empirical testing.FindingsThis study finds that firm-level political risk is negatively associated with innovation and also document that firm-level political risk has a negative impact on innovation for financially constrained and high growth firms. The overall results are robust after addressing the issue of potential endogeneity using entropy balancing and two-stage least squares regression techniques. This study also documents qualitatively consistent results after using alternative measures of innovation as well as firm-level political uncertainty.Research limitations/implicationsThe findings of this study could help the managers to make better investment decision and improve economic efficiency through understanding the effect of firm-level political risk on innovation activities.Originality/valueThe study concentrates on firm-level political risk and innovation and presents new insights that political risk at the microlevel is an important determinant for investment in innovative activities.

Navigating through Political Risk in Vietnam: The Role of Corporate Cash Holdings

ABSTRACT This paper investigates the effect of political risk on corporate cash holdings in Vietnam from 2009 to 2018. We show that political risk is positively associated with cash holdings. Our findings are robust to other advanced estimation methods when alternative measures of political risk are considered and after addressing endogeneity caveats by two-stage least square estimation. Further analyses reveal that the positive impact of political risk on cash holdings is more pronounced for financially constrained firms and firms with high institutional ownership. Overall, the findings contribute to the literature on how political risk exposure increases firm cash holdings, which is consistent with the precautionary savings motive of cash.

A Novel Measure of Political Risk and Foreign Direct Investment Inflows

This paper proposes a novel measure of political risk that confirms some of the findings documented in the Foreign Direct Investments (FDI) literature. Particularly, we confirm the positive relationship between political stability and its components on FDI inflows, and the moderating effect of natural resources on this relationship. The proposed political risk measure contains relevant, unique and incremental information not observed in the literature. For example, although this measure is highly correlated with the political risk rating of the International Country Risk Guide (ICRG), it contains unique information that explains FDI inflows beyond what is explained by the ICRG rating. A link to the database for our political risk rating for 150 countries covering 2000 to 2015 has been provided.

Political risks and financial markets: emerging vs developed economies

PurposeThe authors provide a comparative analysis between emerging and developed financial markets in terms of the effects of political risks on stock market returns and volatility. The authors also examine whether this impact depends on the nature of political risks. Therefore, this study aims to detect which financial markets are the most profitable and the riskiest in terms of political risks.Design/methodology/approachThe authors investigate the impact of political risks on the excess stock market return and its conditional volatility using the generalized ARCH model for a sample of 46 developed and emerging markets over a period ranging from 1995 to 2019. In order to test how the nature of political risks affects equity excess returns and volatility differently in different markets, the authors employ (1) a composite political risk score, (2) the four subgroups of political risks as defined by Bekaert et al. (2005, 2014) and (3) the individual dimensions of political risks.FindingsThe findings indicate that the composite political risk is priced into both stock markets. The effect of political risks is positive for excess returns and negative for volatility. The authors show that the political risk leads to more volatility in developed markets. Nevertheless, the effect of individual components varies according to the market category.Practical implicationsThe authors provide a framework for predicting market returns and volatility using changes in the political risk of the country. The findings help investors make investment decisions based on the political decisions of governments. In other words, investors should consider political uncertainty when determining their expected earnings.Originality/valueThe authors engage monthly panel data methodology in terms of the political risk stock market relationship. In addition, the authors consider recent and very long data covering the period 1995–2019. Furthermore, this study combines three various political risk measures, and both equity returns and volatility.

More transitions, less risk: How renewable energy reduces risks from mining, trade and political dependence

The transition from fossil fuels to renewable energy systems involves enormous decreases in materials, mining, and political risk. Since renewable systems need no fuel, they depend on trade only for the acquisition of materials and components during construction. Once the system is operating, no trade is required to sustain it. Therefore renewable energy production is not exposed to the political risks that plague fossil fuel production and shipments, such as interdiction, embargo, civil war, labor actions, and other disruptions. Despite such benefits, an emerging perspective in the US public discourse makes the opposite case, arguing that a buildout of renewable electricity would exacerbate supply risks, mining intensity, and import dependence. This paper’s findings challenge such assertions. We demonstrate that installing just 1 GW of wind capacity to replace coal on a grid like that in Texas reduces total mining by 25 million tonnes over 20 years. Even if the world increased 12-fold the annual global production of all rare earths, lithium, cobalt, and even copper, the metals produced would comprise just 3% of 2020 world coal production. Over two decades, five times more power would be produced by mining an equivalent amount for wind rather than coal. Since transition materials requirements are so comparatively small, reduced international trade volumes mean a large measure of political risk falls away. Current practices for securing energy systems that require constant fuel deliveries thus offer little relevance for renewables.

COVID-19: Anticipating A Dramatic Collapse And A Recessionary Phase In The World Economy

The global nature of the pandemic, along with its great intensity and prolonged duration, will fundamentally alter the business landscape through changing trade flows, asset prices and consumption patterns. The outpouring of whammy ‘Corona Bug’ a public health crunch, an undetectable foe, jolted the attention of the world population towards the strictness that postured the economic vulnerability in almost all the macroeconomic variables such as GDP growth, headline inflation, unemployment rate, investment, current account balance and a measure of political risk which affected nook-n-corner of the world clock in terms of its demand-supply dynamic disruptions.
 This exploratory study is an attempt to explore the need of the efforts is to put in place a comprehensive action plan and put in the best efforts to implement the plan.

A Novel measure of Political Risk and Foreign Direct Investment Inflows

This paper proposes a novel measure of political risk that is used to confirm some of the findings documented in the Foreign Direct Investments (FDI) literature. Particularly, we confirm the positive relationship between political stability and its components on net FDI inflows, and the mitigating effect of natural resource exports on this relationship. The proposed political risk measure contains relevant, unique and incremental information not observed in the literature. For example, although this measure is highly correlated with the political risk rating of the International Country Risk Guide (ICRG), it contains unique information that explains net FDI flows beyond what is explained by the political risk rating of ICRG.

Political Risk and Corporate Tax Behavior: Firm-Level Evidence

This study investigates the effect of firm-level political risk on corporate tax behavior. Using a novel, firm-level measure of political risk, we find that firms delay tax avoidance investments when facing high political uncertainty, consistent with the implications of the real options theory. In addition, we find that the main effect is more pronounced in firms with greater flexibility to adjust tax positions and firms that are more politically sensitive. Further analyses show that firms with high political risk are associated with less tax planning and consulting fees, less foreign income designated as permanently reinvested earnings, and more lobbying activities. Our findings suggest that the lost tax savings can be a specific channel through which political risk affects shareholder values.

Firm-Level Political Risk: Measurement and Effects*

AbstractWe adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual U.S. firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing that it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm’s actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. These results continue to hold after controlling for news about the mean (as opposed to the variance) of political shocks. Interestingly, the vast majority of the variation in our measure is at the firm level rather than at the aggregate or sector level, in the sense that it is captured neither by the interaction of sector and time fixed effects nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.

Firm-level Political Risk and Credit Markets

We study two effects of firm-level political risk on debt markets. First, we take advantage of a new measure of political risk (Hassan et al. (2019) and the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that changes in borrowers’ level of political risk lead to changes in interest rates set by lenders. Second, we test for the transmission of political risk among economic agents. We predict and find that lender-level political risk propagates to borrowers through lending relationships, which highlights the role of network effects in diffusing risk throughout the economy.

Is Firm-Level Political Exposure Priced?

The effect of economy-wide political uncertainty on stock market returns is well documented in the literature. However, in order to take a stand on the relation between firm-specific political risk and the cross-section of stock returns, we need a measure independent of those returns. Using a machine-learning based firm-specific measure of political risk, we show that political risk is priced in the cross-section of stock returns. On average, a one standard deviation increase in a firm's political risk is associated with a 0.5% to 1.0% increase in their annual returns. Using a related non-price measure that captures the mean of a firm's political-shocks, we disentangle whether the asset pricing implications of political risk stem from news about the discount rate or future cash flows. We further show that political risk is priced only for firms that do not actively manage political risk. Finally, using a natural language processing (NLP) enabled measure of risk associated with political topics, we examine how (and to what extent) sub-components of political risk are priced.

Global Political Risk and Currency Momentum

Using a measure of political risk, relative to the United States, that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals, and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, that is, the past winners, and exploit the lower returns of loser portfolios. The risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio to U.S. political shocks, which is the main component of global political risk.

Determinants of the domestic credits in developing economies: The role of political risks

This paper examines the determinants of the domestic credits in the panel data of 61 developing economies (22 emerging markets and 39 non-emerging developing economies) for the period from 1984 to 2016. The paper finds that the income and the money supply are positively associated with the domestic credits. There also are the negative effects of the current account balance and the interest rate differences on the domestic credits. Further analyses for the subcomponents of the overall political risk measures indicate that the better socioeconomic conditions (i.e. the less poverty, the lower unemployment, and the higher consumer confidence) and the lower corruption positively affect the domestic credits.

Aggregate and Idiosyncratic Political Risk: Measurement and Effects

We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm’s actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. These results continue to hold after controlling for news about the mean (as opposed to the variance) of political shocks. Interestingly, the vast majority of the variation in our measure is at the firm level rather than at the aggregate or sector level, in the sense that it is neither captured by the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.

The determinants of Turkey's exports to Islamic countries: The impact of political risks

ABSTRACTUsing the traditional gravity model, this paper aims to analyze the determinants of Turkish exports to 43 Islamic Development Bank member countries for the period from 1996 to 2015. The paper specifically investigates the effects of 12 political risk measures (bureaucracy quality, corruption, democratic accountability, government stability, internal and external conflict, investment profile, law and order, military in politics, religious and ethnic tensions, and socioeconomic conditions) in the importing countries on the total volume of exports of Turkey. After implementing various robustness checks, the paper finds that the government instability in the importing countries is negatively associated with the Turkish exports.

The effect of political factors on sovereign default

ABSTRACTThis aricle examines the effect of political factors on sovereign default. Using a theoretical model, we find that political instability increases the likelihood of default. To test this theoretical implication, we use a panel logit model to estimate the effect of long- and short-run political factors, along with other macroeconomic variables, on the probability of default. Data from 68 developed and developing countries between 1970 and 2010 is used to conduct the study. Our findings suggest that a country is more likely to default when (i) it has a relatively younger political regime in place; (ii) it faces a higher chance of political turnover; and (iii) it has a less democratic political system. Economic factors are also vital; a country with stronger growth and less external debt is less likely to experience sovereign default. Robustness tests using alternative measures of political risk, trade balance and EMBI sovereign bond spreads also support the baseline findings.

Political risk and sovereign spreads in Latin America

Purpose The purpose of this paper is to explore the relationship between six different dimensions of political risk in a country and its spread for a sample of 12 Latin American countries. Design/methodology/approach The methodology applied consists of panel estimators with fixed effects. In addition, a panel data model with instrumental variables is considered to tackle with potential problems of endogeneity in the model. Findings The results show there is a strong positive relationship between political risk and sovereign spread in Latin America, i.e., greater political risk is associated with greater sovereign spread. This effect is particularly significant when the political risk is associated with a weak rule of law or low-quality regulation in the country. Research limitations/implications The main limitation of this study concerns the potential risks of endogeneity which might exist between sovereign risk and political risk measures, which may not have been completely eliminated with the econometric methodology used. Originality/value This paper contributes to the literature of sovereign risk by studying the dimension of political risk in detail. Specifically, six dimensions of political risk are studied. Additionally, it provides empirical evidence, including the 2008 financial crisis period, regarding the determinants of spreads on Latin American economies.

International Real Estate Review

This study investigates the impact of political risk on the cost of capital for publicly traded real estate firms. More specifically, by using a sample of 102 REITs and listed property trusts, which hold nearly 6,000 distinct investment properties across the Asia-Pacific region, we find strong empirical evidence that increased exposure to political risk increases both the cost of equity financing of a firm and its weighted average cost of capital. Interestingly, no such linkages are apparent between political risk and the cost of debt of a firm. These empirical results are robust to a variety of alternative measures of political risk, including a: 1) political rights index, 2) political change index, and 3) corruption perceptions index.