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The impact of political uncertainty on the cost of capital

Author

Listed:
  • Frank Kwabi

    (Leeds Business School, Leeds Beckett University)

  • Andrews Owusu

    (University of Derby)

  • Ernest Ezeani

    (Heriot Watt University)

  • Agyenim Boateng

    (Leeds Business School, Leeds Beckett University)

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.

Suggested Citation

  • Frank Kwabi & Andrews Owusu & Ernest Ezeani & Agyenim Boateng, 2024. "The impact of political uncertainty on the cost of capital," Review of Quantitative Finance and Accounting, Springer, vol. 62(4), pages 1397-1429, May.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:4:d:10.1007_s11156-023-01236-2
    DOI: 10.1007/s11156-023-01236-2
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    More about this item

    Keywords

    Cost of capital; Political uncertainty; Foreign equity portfolio flow; Institutional quality;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G2 - Financial Economics - - Financial Institutions and Services
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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