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Geopolitics and corporate risk: Evidence from EU-Russia conflict shocks

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  • Kagerer, B.

Abstract

This paper studies the impact of conflict shocks, identified by event-day heteroskedasticity using EU-Russia sanction and countersanction announcements since 2014, on corporate credit spreads. Exploiting changes in the variance-covariance structure of financial and news variables with gas prices around (counter)sanction announcement days, the paper presents a new approach to the identification of geopolitical risk shocks. Conflict shocks raise credit spreads as both firm default risk and risk premia rise. The effect of conflict on credit risk is strongly heterogeneous across and within industries and countries, reflecting economic vulnerabilities. The borrowing cost of firms with high leverage levels and low earnings are more sensitive to conflict shocks, however, only for the former also risk premia rise, suggesting a collateral-based borrowing constraint. Heightened credit risk is also reflected in declining investment levels, rising bankruptcy rates, and elevated import prices due to conflict.

Suggested Citation

  • Kagerer, B., 2024. "Geopolitics and corporate risk: Evidence from EU-Russia conflict shocks," Cambridge Working Papers in Economics 2471, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2471
    Note: bmck3
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    Keywords

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    JEL classification:

    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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