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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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