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Political uncertainty and the cost of equity capital

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  • Li, Xiaorong
  • Luo, Jingbo
  • Chan, Kam C.

Abstract

We study the impact of political uncertainty on the cost of equity. The change of communist party secretaries every several years in Chinese cities provides a good setting for our analysis. Our results suggest that a firm's cost of equity is higher when facing political uncertainty. In addition, we find that when a firm receives a large amount of government subsidies, the CEO/chairman is politically connected, or when the stock market is a bear market, the adverse effect is stronger. In contrast, after the anti-corruption campaign in 2012 or the city is financially advanced, the adverse impact is less pronounced.

Suggested Citation

  • Li, Xiaorong & Luo, Jingbo & Chan, Kam C., 2018. "Political uncertainty and the cost of equity capital," Finance Research Letters, Elsevier, vol. 26(C), pages 215-222.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:215-222
    DOI: 10.1016/j.frl.2018.01.009
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    Cited by:

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    3. Yuchen Lin & Daxin Dong & Jiaxin Wang, 2021. "The Negative Impact of Uncertainty on R&D Investment: International Evidence," Sustainability, MDPI, vol. 13(5), pages 1-21, March.
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    6. Ahmed, Walid M.A., 2020. "Corruption and equity market performance: International comparative evidence," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    7. Cheng, Maoyong & Geng, Hongyan, 2021. "Do local firms employ political activities to respond to political uncertainty?," Journal of Asian Economics, Elsevier, vol. 73(C).
    8. Amairi, Haifa & Gallali, Mohamed Imen & Sassi, Syrine, 2022. "Market pressure and cost of equity: Revisited," Finance Research Letters, Elsevier, vol. 47(PB).
    9. Zhao, Ling & Huang, Hao, 2024. "Information disclosure by industry and the cost of equity: Evidence from a quasi-natural experiment in China," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 196-212.
    10. Gonçalves, Tiago & Barros, Victor & Serra, Gonçalo, 2022. "Political elections uncertainty and earnings management: Does firm size really matter?," Economics Letters, Elsevier, vol. 214(C).
    11. Ma, Huanyu & Hao, Dapeng, 2022. "Economic policy uncertainty, financial development, and financial constraints: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 368-386.
    12. 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).
    13. Schütz, Claudio & Pape, Ulrich, 2024. "Are investors afraid of populism?," Finance Research Letters, Elsevier, vol. 61(C).
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