The impact of political uncertainty on the cost of capital

Frank Kwabi (), Andrews Owusu (), Ernest Ezeani () and Agyenim Boateng ()
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Frank Kwabi: Leeds Business School, Leeds Beckett University
Andrews Owusu: University of Derby
Ernest Ezeani: Heriot Watt University
Agyenim Boateng: Leeds Business School, Leeds Beckett University

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 4, No 3, 1397-1429

Abstract: Abstract We investigate the impact of political uncertainty on the relationship between foreign equity portfolio flow and the cost of capital. Using panel data from 40 countries from 2001 to 2016, our results show that the year before a national election is associated with a higher cost of capital. Further analyses show that the relationship between international equity portfolio flow and the cost of capital is sensitive to political uncertainty. In line with the institutional quality channel, we find that checks and balances interact with political uncertainty to reduce the negative effects of political uncertainty on the cost of capital. The results are consistent with the hypothesis that foreign investors strategically reduce their equity portfolio investment to the recipient country before a national election which reduces risk-sharing between domestic and foreign investors.

Keywords: Cost of capital; Political uncertainty; Foreign equity portfolio flow; Institutional quality (search for similar items in EconPapers)
JEL-codes: F3 G15 G2 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01236-2

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