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Does geopolitical risk affect firms' idiosyncratic volatility? Evidence from China

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  • Ren, Xiaohang
  • Cao, Yuxuan
  • Liu, Pei Jose
  • Han, Dun

Abstract

Using 2663 Chinese A-share listed companies from 2003 to 2019, we investigate the relationship between geopolitical risk (GPR) and firm idiosyncratic volatility through panel fixed effects and attempt to explain the mechanism. The main findings are presented as follows. First, GPR can explain the change of firms' idiosyncratic volatility. Different industry conditions and ownerships have heterogeneous effects on the firms' idiosyncratic volatilities. In addition, the interaction terms of ownership concentration, competitive intensity and operating leverage with GPR are statistically significant, and they interact with GPR to affect firms' idiosyncratic volatility. After we conduct a series of robustness tests using methods such as instrumental variables, we innovatively introduce the South China Sea dispute as an external event and use the DID (Difference-in-difference) model to analyze the impact of geopolitical events on corporate risk-taking, our findings remain valid. Our research contributes to a better understanding of geopolitical risk and firms' idiosyncratic volatility.

Suggested Citation

  • Ren, Xiaohang & Cao, Yuxuan & Liu, Pei Jose & Han, Dun, 2023. "Does geopolitical risk affect firms' idiosyncratic volatility? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003599
    DOI: 10.1016/j.irfa.2023.102843
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