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Friend or foe? Bilateral political relations and the portfolio allocation of foreign institutional investors

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  • Lugo, Stefano
  • Montone, Maurizio

Abstract

We study the role of bilateral political relations in explaining variations in the equity portfolio allocation of foreign institutional investors. Using a large sample at the fund–firm–year level, we find that political distance between countries leads to significant retrenchment of foreign institutional investors from local firms. Consistent with our theorized mechanisms, we find that the effect is stronger for stocks that are more exposed to geopolitical risk, dividend-paying, and less liquid, as foreign investors sell off local securities perceived to become riskier to hold. Overall, our findings identify a novel financial channel through which geopolitical risk affects international equity markets.

Suggested Citation

  • Lugo, Stefano & Montone, Maurizio, 2026. "Friend or foe? Bilateral political relations and the portfolio allocation of foreign institutional investors," Journal of Corporate Finance, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:corfin:v:97:y:2026:i:c:s0929119925002056
    DOI: 10.1016/j.jcorpfin.2025.102937
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    JEL classification:

    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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