Political risk and international valuation

Geert Bekaert, Campbell Harvey (), Christian T. Lundblad and Stephan Siegel ()

Journal of Corporate Finance, 2016, vol. 37, issue C, 1-23

Abstract: Measuring the impact of political risk on investment projects is one of the most vexing issues in international business. One popular approach is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is flawed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis — leading to the double counting of risks. We propose to use “political risk spreads” to undo the double counting in the evaluation of international investment projects.

Keywords: Political risk; Sovereign spread; Sovereign risk; Capital budgeting; International cost of capital; Project evaluation (search for similar items in EconPapers)
JEL-codes: F23 F51 F65 G15 G31 H63 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:37:y:2016:i:c:p:1-23

DOI: 10.1016/j.jcorpfin.2015.12.007

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