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Political Ideology and International Capital Allocation

Author

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  • Kempf, Elisabeth
  • Luo, Mancy
  • Schäfer, Larissa
  • Tsoutsoura, Margarita

Abstract

Does investors' political ideology shape international capital allocation? We provide evidence from two settings---syndicated corporate loans and equity mutual funds---to show ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Ideological alignment on both economic and social issues plays a role. Our empirical strategy ensures direct economic effects of foreign elections or government ties between countries are not driving the result. Ideological distance between countries also explains variation in bilateral investment. Combined, our findings imply ideological alignment is an important, omitted factor in models of international capital allocation.

Suggested Citation

  • Kempf, Elisabeth & Luo, Mancy & Schäfer, Larissa & Tsoutsoura, Margarita, 2022. "Political Ideology and International Capital Allocation," CEPR Discussion Papers 16533, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16533
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    4. Tang, Ning & Huang, Yin-Siang, 2025. "Geopolitical risk exposure and credit terms: Evidence from Global supply chains," Economics Letters, Elsevier, vol. 254(C).
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    6. Fleta-Asín, Jorge & Muñoz, Fernando, 2025. "In the name of the law: How does legal distance affect US international mutual funds’ financial performance?," Research in International Business and Finance, Elsevier, vol. 74(C).
    7. Jaume Belles-Sampera & Montserrat Guillen & Miguel Santolino, 2023. "Haircut Capital Allocation as the Solution of a Quadratic Optimisation Problem," Mathematics, MDPI, vol. 11(18), pages 1-17, September.
    8. Fidrmuc, Jan & Gaibulloev, Khusrav & Mirzaei, Ali & Moore, Tomoe, 2024. "The effect of capital inflows on the imports of capital goods in developing countries," Journal of Corporate Finance, Elsevier, vol. 84(C).
    9. Serhan Cevik, 2025. "Long live globalization: geopolitical shocks and international trade," International Economics and Economic Policy, Springer, vol. 22(2), pages 1-20, May.
    10. Chrétien, Stéphane & Fu, Hsuan, 2023. "Presidential cycles in international equity flows and returns," Finance Research Letters, Elsevier, vol. 53(C).
    11. Michele Cascarano & Laura Sigalotti & Francesco Stradi, 2025. "EU views and household investments: evidence from the Brexit referendum," Temi di discussione (Economic working papers) 1504, Bank of Italy, Economic Research and International Relations Area.
    12. Antoniou, Constantinos & Cuculiza, Carina & Kumar, Alok & Yang, Lizhengbo, 2025. "Seeing is believing: Tourism and foreign equity investments," Journal of Banking & Finance, Elsevier, vol. 178(C).
    13. Dossi, Gaia & Morando, Marta, 2023. "Political ideology and innovation," LSE Research Online Documents on Economics 126760, London School of Economics and Political Science, LSE Library.
    14. Liu, Lei, 2025. "How does regional judicial quality improvement enhance enterprises' capital allocation efficiency: Evidence from the establishment of circuit court," International Review of Financial Analysis, Elsevier, vol. 103(C).
    15. Lambert, Thomas & Mishra, Prachi, 2021. "The Politics of the Paycheck Protection Program," CEPR Discussion Papers 16842, C.E.P.R. Discussion Papers.
    16. Ayca Topaloglu-Bozkurt & Tuba Pelin Sumer & Suheyla Ozyildirim, 2025. "Banks’ Cross-Border Borrowing and Currency Shock: Evidence from an Emerging Economy," Working Papers 2513, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    17. Nguyen, Thien Le-Hoang & Hsieh, Hui-Ching, 2025. "Iron curtain echoes: The enduring impact of communism and crowdfunding," Journal of Corporate Finance, Elsevier, vol. 91(C).
    18. Song, Jun Myung & Kim, Woochan, 2025. "Do U.S. Institutional investors react to international politics?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 101(C).
    19. Aiyar, Shekhar & Malacrino, Davide & Presbitero, Andrea F., 2024. "Investing in friends: The role of geopolitical alignment in FDI flows," European Journal of Political Economy, Elsevier, vol. 83(C).
    20. Songbo Jia & Chenying Sang & Shiwei Su & Jianxiang Xu, 2023. "Deleveraging and decapacity: A comparative analysis of corporate capital allocation based on asset reversibility," PLOS ONE, Public Library of Science, vol. 18(11), pages 1-31, November.
    21. Matteo Crosignani & Lina Han & Marco Macchiavelli, 2025. "Navigating Geoeconomic Risk: Evidence from U.S. Mutual Funds," Staff Reports 1172, Federal Reserve Bank of New York.
    22. Ahmad, Muhammad Farooq & Lambert, Thomas & Martín-Flores, José M. & Romec, Arthur, 2024. "Does democracy shape international merger activity?," Journal of International Economics, Elsevier, vol. 152(C).
    23. Zhou, Lu Jolly & Kong, Weimin & Li, Yunshen, 2023. "Cross-listing and predation risk in product markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    24. De Haas, Ralph & Popov, Alexander & Mamonov, Mikhail & Shala, Iliriana, 2025. "Violent conflict and cross-border lending," Working Paper Series 3073, European Central Bank.

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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