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Counting the investor vote: political business cycle effects on sovereign bond spreads in developing countries

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Author Info

  • Paul M Vaaler

    (The Fletcher School of Law and Diplomacy, Tufts University, Medford, MA, USA)

  • Burkhard N Schrage

    (Singapore Management University, Singapore)

  • Steven A Block

    (The Fletcher School of Law and Diplomacy, Tufts University, Medford, MA, USA)

Abstract

International business research has paid scant attention to whether and how electoral politics and economic policies affect foreign investment risk assessment, particularly in developing countries, where the last decade has seen both considerable foreign investment and domestic progress toward democratization and electoral competitiveness. We respond with development and testing of a framework using partisan and opportunistic political business cycle (PBC) theory to predict the investment risk perceived by investors holding sovereign bonds during 19 presidential elections in 12 developing countries from 1994 to 2000. Consistent with our framework, we find that bondholders perceive higher (lower) investment risk in the form of higher (lower) credit spreads on their sovereign bonds as right-wing (left-wing) political incumbents appear more likely to be replaced by left-wing (right-wing) challengers. For international business research, our findings illustrate the promise of PBC theory in explaining the election-period behavior of sovereign bondholders and, perhaps, other investors who also ‘vote’ in developing country elections and can substantially influence the price and availability of capital there. For developing country investors and states, our findings highlight the financial effects of democracy in action, and underscore the importance of state communication with investors during election periods. Journal of International Business Studies (2005) 36, 62–88. doi:10.1057/palgrave.jibs.8400111

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

Volume (Year): 36 (2005)
Issue (Month): 1 (January)
Pages: 62-88

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Handle: RePEc:pal:jintbs:v:36:y:2005:i:1:p:62-88

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Cited by:
  1. Vaaler, Paul M., 2006. "Electoral Politics and Foreign Project Investment in Developing Countries," Working Papers 06-0125, University of Illinois at Urbana-Champaign, College of Business.
  2. Moser, Christoph, 2007. "The Impact of Political Risk on Sovereign Bond Spreads - Evidence from Latin America," Proceedings of the German Development Economics Conference, Göttingen 2007 24, Verein für Socialpolitik, Research Committee Development Economics.
  3. Roberto Chang, 2010. "Elections, Capital Flows, and Politico-economic Equilibria," American Economic Review, American Economic Association, vol. 100(4), pages 1759-77, September.
  4. Geert Bekaert & Campbell R. Harvey & Christian T. Lundblad & Stephan Siegel, 2014. "Political Risk Spreads," NBER Working Papers 19786, National Bureau of Economic Research, Inc.
  5. Qi, Yaxuan & Roth, Lukas & Wald, John K., 2010. "Political rights and the cost of debt," Journal of Financial Economics, Elsevier, vol. 95(2), pages 202-226, February.
  6. Jensen, Nathan M & Rahman, Aminur, 2011. "The silence of corruption : identifying underreporting of business corruption through randomized response techniques," Policy Research Working Paper Series 5696, The World Bank.

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