The impact of political uncertainty on the cost of capital

Journal article


Kwabi, F., Owusu, A., Ezeani, E. and Boateng, A. 2024. The impact of political uncertainty on the cost of capital. Review of Quantitative Finance and Accounting. pp. 1-33. https://doi.org/10.1007/s11156-023-01236-2
AuthorsKwabi, F., Owusu, A., Ezeani, E. and Boateng, A.
Abstract

We investigate the impact of political uncertainty on the relationship between foreign equity portfolio flow and the cost of capital. Using panel data from 40 countries from 2001 to 2016, our results show that the year before a national election is associated with a higher cost of capital. Further analyses show that the relationship between international equity portfolio flow and the cost of capital is sensitive to political uncertainty. In line with the institutional quality channel, we find that checks and balances interact with political uncertainty to reduce the negative effects of political uncertainty on the cost of capital. The results are consistent with the hypothesis that foreign investors strategically reduce their equity portfolio investment to the recipient country before a national election which reduces risk-sharing between domestic and foreign investors.

KeywordsCost of capital; political uncertainty; foreign equity portfolio flow; institutional quality
Year2024
JournalReview of Quantitative Finance and Accounting
Journal citationpp. 1-33
PublisherSpringer
ISSN1573-7179
Digital Object Identifier (DOI)https://doi.org/10.1007/s11156-023-01236-2
Web address (URL)https://link.springer.com/article/10.1007/s11156-023-01236-2
Accepted author manuscript
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File Access Level
Controlled
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File Access Level
Controlled
Output statusPublished
Publication dates
Online20 Jan 2024
Publication process dates
Accepted12 Dec 2023
Deposited22 Jan 2024
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