Political polarization between foreign and local investment in emerging markets

Using unrelated international shocks as an exogenous source of distraction, this paper finds that foreign attention paid to national elections in 23 emerging markets raises (lowers) stock returns around right-leaning (left-leaning) electoral victories, indicating that foreign investors react more positively to right governments than left governments, relative to local investors. These effects are independent of the candidate’s economic platform and are particularly strong around incumbents with a poor economic record, suggesting that foreign investors are more (less) confident in the ability of right (left) governments to manage the economy than local investors, regardless of what economic policies these governments support.