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Political risk and international valuation

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  • Bekaert, Geert
  • Harvey, Campbell R.
  • Lundblad, Christian T.
  • Siegel, Stephan

Abstract

Measuring the impact of political risk on investment projects is one of the most vexing issues in international business. One popular approach is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is flawed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis — leading to the double counting of risks. We propose to use “political risk spreads” to undo the double counting in the evaluation of international investment projects.

Suggested Citation

  • Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian T. & Siegel, Stephan, 2016. "Political risk and international valuation," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 1-23.
    • Handle: RePEc:eee:corfin:v:37:y:2016:i:c:p:1-23
    DOI: 10.1016/j.jcorpfin.2015.12.007
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    More about this item

    Keywords

    Political risk; Sovereign spread; Sovereign risk; Capital budgeting; International cost of capital; Project evaluation;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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