The impact of political uncertainty on the cost of capital

Frank Obenpong Kwabi*, Andrews Owusu, Ernest Ezeani, Agyenim Boateng

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

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.
Original languageEnglish
Pages (from-to)1397-1429
Number of pages33
JournalReview of Quantitative Finance and Accounting
Volume62
Issue number4
Early online date20 Jan 2024
DOIs
Publication statusPublished - May 2024

Keywords

  • Cost of capital
  • Foreign equity portfolio flow
  • Institutional quality
  • Political uncertainty

ASJC Scopus subject areas

  • Accounting
  • General Business,Management and Accounting
  • Finance

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