IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v90y2023ics1057521923003599.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521923003599
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2023.102843?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dario Caldara & Matteo Iacoviello, 2022. "Measuring Geopolitical Risk," American Economic Review, American Economic Association, vol. 112(4), pages 1194-1225, April.
    2. Abdel-Latif, Hany & El-Gamal, Mahmoud, 2020. "Financial liquidity, geopolitics, and oil prices," Energy Economics, Elsevier, vol. 87(C).
    3. Lee, Chien-Chiang & Wang, Chih-Wei, 2021. "Firms' cash reserve, financial constraint, and geopolitical risk," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    4. Citci, Sadettin Haluk & Inci, Eren, 2016. "The masquerade ball of the CEOs and the mask of excessive risk," Economic Modelling, Elsevier, vol. 58(C), pages 383-393.
    5. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-1384, December.
    6. Apergis, Emmanuel & Apergis, Nicholas, 2016. "The 11/13 Paris terrorist attacks and stock prices: The case of the international defense industry," Finance Research Letters, Elsevier, vol. 17(C), pages 186-192.
    7. Antonakakis, Nikolaos & Gupta, Rangan & Kollias, Christos & Papadamou, Stephanos, 2017. "Geopolitical risks and the oil-stock nexus over 1899–2016," Finance Research Letters, Elsevier, vol. 23(C), pages 165-173.
    8. Koirala, Santosh & Marshall, Andrew & Neupane, Suman & Thapa, Chandra, 2020. "Corporate governance reform and risk-taking: Evidence from a quasi-natural experiment in an emerging market," Journal of Corporate Finance, Elsevier, vol. 61(C).
    9. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
    10. Yu, Zhen & Xiao, Yao & Li, Jinpo, 2021. "How does geopolitical uncertainty affect Chinese overseas investment in the energy sector? Evidence from the South China Sea Dispute," Energy Economics, Elsevier, vol. 100(C).
    11. Cheng, Chak Hung Jack & Chiu, Ching-Wai (Jeremy), 2018. "How important are global geopolitical risks to emerging countries?," International Economics, Elsevier, vol. 156(C), pages 305-325.
    12. Bekaert, Geert & Hodrick, Robert J. & Zhang, Xiaoyan, 2012. "Aggregate Idiosyncratic Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(6), pages 1155-1185, December.
    13. Corbet, Shaen & Gurdgiev, Constantin & Meegan, Andrew, 2018. "Long-term stock market volatility and the influence of terrorist attacks in Europe," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 118-131.
    14. Vasia Panousi & Dimitris Papanikolaou, 2012. "Investment, Idiosyncratic Risk, and Ownership," Journal of Finance, American Finance Association, vol. 67(3), pages 1113-1148, June.
    15. Armstrong, Christopher S. & Vashishtha, Rahul, 2012. "Executive stock options, differential risk-taking incentives, and firm value," Journal of Financial Economics, Elsevier, vol. 104(1), pages 70-88.
    16. Frank, Murray Z. & Goyal, Vidhan K., 2004. "The effect of market conditions on capital structure adjustment," Finance Research Letters, Elsevier, vol. 1(1), pages 47-55, March.
    17. Malagon, Juliana & Moreno, David & Rodríguez, Rosa, 2015. "The idiosyncratic volatility anomaly: Corporate investment or investor mispricing?," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 224-238.
    18. Gkillas, Konstantinos & Gupta, Rangan & Pierdzioch, Christian, 2020. "Forecasting realized gold volatility: Is there a role of geopolitical risks?," Finance Research Letters, Elsevier, vol. 35(C).
    19. Banerjee, Rajabrata & Gupta, Kartick, 2017. "The effects of environmental sustainability and R&D on corporate risk-taking: International evidence," Energy Economics, Elsevier, vol. 65(C), pages 1-15.
    20. Kose John & Lubomir Litov & Bernard Yeung, 2008. "Corporate Governance and Risk‐Taking," Journal of Finance, American Finance Association, vol. 63(4), pages 1679-1728, August.
    21. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    22. Lee, Chi-Chuan & Lee, Chien-Chiang, 2020. "Insurance activity, real output, and geopolitical risk: Fresh evidence from BRICS," Economic Modelling, Elsevier, vol. 92(C), pages 207-215.
    23. Balcilar, Mehmet & Bonato, Matteo & Demirer, Riza & Gupta, Rangan, 2018. "Geopolitical risks and stock market dynamics of the BRICS," Economic Systems, Elsevier, vol. 42(2), pages 295-306.
    24. Manuel Ammann & David Oesch & Markus M. Schmid, 2013. "Product Market Competition, Corporate Governance, and Firm Value: Evidence from the EU Area," European Financial Management, European Financial Management Association, vol. 19(3), pages 452-469, June.
    25. Alqahtani, Abdullah & Bouri, Elie & Vo, Xuan Vinh, 2020. "Predictability of GCC stock returns: The role of geopolitical risk and crude oil returns," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 239-249.
    26. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    27. Bolton, Patrick & Chen, Hui & Wang, Neng, 2013. "Market timing, investment, and risk management," Journal of Financial Economics, Elsevier, vol. 109(1), pages 40-62.
    28. Kim, Kyonghee & Patro, Sukesh & Pereira, Raynolde, 2017. "Option incentives, leverage, and risk-taking," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 1-18.
    29. Khoo, Joye & (Wai Kong) Cheung, Adrian, 2022. "Managerial ability and debt maturity," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(1).
    30. Serfling, Matthew A., 2014. "CEO age and the riskiness of corporate policies," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 251-273.
    31. Chen Lian & Yueran Ma & Carmen Wang, 2019. "Low Interest Rates and Risk-Taking: Evidence from Individual Investment Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2107-2148.
    32. Block, Joern H., 2012. "R&D investments in family and founder firms: An agency perspective," Journal of Business Venturing, Elsevier, vol. 27(2), pages 248-265.
    33. Le, Anh-Tuan & Tran, Thao Phuong, 2021. "Does geopolitical risk matter for corporate investment? Evidence from emerging countries in Asia," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    34. Tuan Ho & Duc N. Phung & Yen N. Nguyen, 2021. "State ownership and corporate risk‐taking: Empirical evidence in Vietnam," Australian Economic Papers, Wiley Blackwell, vol. 60(3), pages 466-481, September.
    35. Kun Su & Liuchuang Li & Rui Wan, 2017. "Ultimate ownership, risk-taking and firm value: evidence from China," Asia Pacific Business Review, Taylor & Francis Journals, vol. 23(1), pages 10-26, January.
    36. Yin, Libo & Lu, Man, 2022. "Oil uncertainty and firms' risk-taking," Energy Economics, Elsevier, vol. 108(C).
    37. He, Feng & Qin, Shuqi & Liu, Yuanyuan & Wu, Ji (George), 2022. "CSR and idiosyncratic risk: Evidence from ESG information disclosure," Finance Research Letters, Elsevier, vol. 49(C).
    38. Ding, Shujun & Jia, Chunxin & Qu, Baozhi & Wu, Zhenyu, 2015. "Corporate risk-taking: Exploring the effects of government affiliation and executives' incentives," Journal of Business Research, Elsevier, vol. 68(6), pages 1196-1204.
    39. Gupta, Kartick & Krishnamurti, Chandrasekhar, 2018. "Do macroeconomic conditions and oil prices influence corporate risk-taking?," Journal of Corporate Finance, Elsevier, vol. 53(C), pages 65-86.
    40. Nam Hoai Tran & Chi Dat Le & David McMillan, 2020. "Ownership concentration, corporate risk-taking and performance: Evidence from Vietnamese listed firms," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1732640-173, January.
    41. Ren, Xiaohang & Zhang, Xiao & Yan, Cheng & Gozgor, Giray, 2022. "Climate policy uncertainty and firm-level total factor productivity: Evidence from China," Energy Economics, Elsevier, vol. 113(C).
    42. Qin, Yun & Hong, Kairong & Chen, Jinyu & Zhang, Zitao, 2020. "Asymmetric effects of geopolitical risks on energy returns and volatility under different market conditions," Energy Economics, Elsevier, vol. 90(C).
    43. Barbara Sveva Magnanelli & Maria Federica Izzo, 2017. "Corporate social performance and cost of debt: the relationship," Social Responsibility Journal, Emerald Group Publishing Limited, vol. 13(2), pages 250-265, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yin, Libo & Lu, Man, 2022. "Oil uncertainty and firms' risk-taking," Energy Economics, Elsevier, vol. 108(C).
    2. Faheem Aslam & Paulo Ferreira & Haider Ali & Ana Ercília José, 2022. "Application of Multifractal Analysis in Estimating the Reaction of Energy Markets to Geopolitical Acts and Threats," Sustainability, MDPI, vol. 14(10), pages 1-23, May.
    3. Tang, Yumei & Chen, Xihui Haviour & Sarker, Provash Kumer & Baroudi, Sarra, 2023. "Asymmetric effects of geopolitical risks and uncertainties on green bond markets," Technological Forecasting and Social Change, Elsevier, vol. 189(C).
    4. Zhou, Mei-Jing & Huang, Jian-Bai & Chen, Jin-Yu, 2020. "The effects of geopolitical risks on the stock dynamics of China's rare metals: A TVP-VAR analysis," Resources Policy, Elsevier, vol. 68(C).
    5. Le, Anh-Tuan & Tran, Thao Phuong, 2021. "Does geopolitical risk matter for corporate investment? Evidence from emerging countries in Asia," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    6. Xiao, Jihong & Wen, Fenghua & He, Zhifang, 2023. "Impact of geopolitical risks on investor attention and speculation in the oil market: Evidence from nonlinear and time-varying analysis," Energy, Elsevier, vol. 267(C).
    7. Vural-Yavaş, Çiğdem, 2020. "Corporate risk-taking in developed countries: The influence of economic policy uncertainty and macroeconomic conditions," Journal of Multinational Financial Management, Elsevier, vol. 54(C).
    8. Lee, Chi-Chuan & Lee, Chien-Chiang & Li, Yong-Yi, 2021. "Oil price shocks, geopolitical risks, and green bond market dynamics," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    9. Choi, Sun-Yong, 2022. "Evidence from a multiple and partial wavelet analysis on the impact of geopolitical concerns on stock markets in North-East Asian countries," Finance Research Letters, Elsevier, vol. 46(PB).
    10. Tamilselvan, M. & Halder, Abhishek & Kannadhasan, M., 2024. "Exploring the ingredients, mixtures, and inclinations of geopolitical risk," International Review of Economics & Finance, Elsevier, vol. 90(C), pages 187-206.
    11. Caixe, Daniel Ferreira, 2022. "Corporate governance and investment sensitivity to policy uncertainty in Brazil," Emerging Markets Review, Elsevier, vol. 51(PB).
    12. Mo, Bin & Nie, He & Zhao, Rongjie, 2024. "Dynamic nonlinear effects of geopolitical risks on commodities: Fresh evidence from quantile methods," Energy, Elsevier, vol. 288(C).
    13. Aysan, Ahmet Faruk & Polat, Ali Yavuz & Tekin, Hasan & Tunalı, Ahmet Semih, 2022. "The Ascent of Geopolitics: Scientometric Analysis and Ramifications of Geopolitical Risk," MPRA Paper 112741, University Library of Munich, Germany.
    14. Ahdi Noomen Ajmi & Roula Inglesi-Lotz, 2021. "Revisiting the Kuznets Curve Hypothesis for Tunisia: Carbon Dioxide vs. Ecological Footprint," Working Papers 202171, University of Pretoria, Department of Economics.
    15. Li, Sufang & Tu, Dalun & Zeng, Yan & Gong, Chenggang & Yuan, Di, 2022. "Does geopolitical risk matter in crude oil and stock markets? Evidence from disaggregated data," Energy Economics, Elsevier, vol. 113(C).
    16. Lee, Chi-Chuan & Tang, Huayun & Li, Ding, 2022. "The roles of oil shocks and geopolitical uncertainties on China’s green bond returns," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 494-505.
    17. Lee, Chi-Chuan & Lee, Chien-Chiang, 2020. "Insurance activity, real output, and geopolitical risk: Fresh evidence from BRICS," Economic Modelling, Elsevier, vol. 92(C), pages 207-215.
    18. Yang, Jianlei & Yang, Chunpeng, 2021. "The impact of mixed-frequency geopolitical risk on stock market returns," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 226-240.
    19. Lee, Chi-Chuan & Lee, Chien-Chiang & Xiao, Shunyi, 2021. "Policy-related risk and corporate financing behavior: Evidence from China’s listed companies," Economic Modelling, Elsevier, vol. 94(C), pages 539-547.
    20. Zhang, Yulian & Hamori, Shigeyuki, 2022. "A connectedness analysis among BRICS’s geopolitical risks and the US macroeconomy," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 182-203.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003599. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.