IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v64y2016icp1-15.html
   My bibliography  Save this article

Capital accumulation in a politically unstable region

Author

Listed:
  • Herrala, Risto
  • Turk-Ariss, Rima

Abstract

We investigate the different channels by which political instability impacts capital accumulation using a unique data of firms from the Middle East and North Africa (MENA), a region that has long suffered from political unrest, and a novel empirical method. We find that political stability shapes firm investment mainly via its influence on credit conditions. Political instability tightens borrowing constraints and impedes capital accumulation, thereby adversely affecting economic growth.

Suggested Citation

  • Herrala, Risto & Turk-Ariss, Rima, 2016. "Capital accumulation in a politically unstable region," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 1-15.
    • Handle: RePEc:eee:jimfin:v:64:y:2016:i:c:p:1-15
    DOI: 10.1016/j.jimonfin.2016.01.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560616000176
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2016.01.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fungáčová, Zuzana & Herrala, Risto & Weill, Laurent, 2013. "The influence of bank ownership on credit supply: Evidence from the recent financial crisis," Emerging Markets Review, Elsevier, vol. 15(C), pages 136-147.
    2. Malik, Adeel & Awadallah, Bassem, 2013. "The Economics of the Arab Spring," World Development, Elsevier, vol. 45(C), pages 296-313.
    3. World Bank, 2009. "From Privilege to Competition : Unlocking Private-Led Growth in the Middle East and North Africa," World Bank Publications - Books, The World Bank Group, number 13524.
    4. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
    5. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    6. Michel A. Habib & Alexander Ljungqvist, 2005. "Firm Value and Managerial Incentives: A Stochastic Frontier Approach," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2053-2094, November.
    7. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    8. Rodrik, Dani, 1999. "Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses," Journal of Economic Growth, Springer, vol. 4(4), pages 385-412, December.
    9. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
    10. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    11. Hunt-McCool, Janet & Koh, Samuel C & Francis, Bill B, 1996. "Testing for Deliberate Underpricing in the IPO Premarket: A Stochastic Frontier Approach," The Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1251-1269.
    12. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    13. Daron Acemoglu & James A. Robinson, 2008. "Persistence of Power, Elites, and Institutions," American Economic Review, American Economic Association, vol. 98(1), pages 267-293, March.
    14. Zsofia Arvai & Ananthakrishnan Prasad & Kentaro Katayama, 2014. "Macroprudential Policy in the GCC Countries," IMF Staff Discussion Notes 14/1, International Monetary Fund.
    15. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    16. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.
    17. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    18. repec:zbw:bofrdp:2009_010 is not listed on IDEAS
    19. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2005. "Bank performance, efficiency and ownership in transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 31-53, January.
    20. Djavad Salehi-Isfahani, 2010. "Human Development in the Middle East and North Africa," Human Development Research Papers (2009 to present) HDRP-2010-26, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).
    21. Herrala, Risto, 2014. "Forward-looking reaction to bank regulation," Working Paper Series 1645, European Central Bank.
    22. Ms. Zsofia Arvai & Mr. Ananthakrishnan Prasad & Mr. Kentaro Katayama, 2014. "Macroprudential Policy in the GCC Countries," IMF Staff Discussion Notes 2014/001, International Monetary Fund.
    23. Francis, Bill B. & Hasan, Iftekhar & Zhu, Yun, 2014. "Political uncertainty and bank loan contracting," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 281-286.
    24. repec:wbk:wbpubs:13523 is not listed on IDEAS
    25. Roberto R. Rocha & Zsofia Arvai & Subika Farazi, 2011. "Financial Access and Stability : A Road Map for the Middle East and North Africa," World Bank Publications - Books, The World Bank Group, number 2360.
    26. Roberto Rocha, 2011. "Financial Access and Stability : A Road Map for the Middle East and North Africa," World Bank Publications - Reports 10868, The World Bank Group.
    27. Demirguc-Kunt Asli & Klapper Leora & Randall Douglas, 2014. "Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults," Review of Middle East Economics and Finance, De Gruyter, vol. 10(2), pages 177-218, August.
    28. Faria, João Ricardo & McAdam, Peter, 2015. "Macroeconomic adjustment under regime change: From social contract to Arab Spring," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 1-22.
    29. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    30. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    31. Roe, Mark J. & Siegel, Jordan I., 2011. "Political instability: Effects on financial development, roots in the severity of economic inequality," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 279-309, September.
    32. J. Helliwell & G. Glorieux, 1970. "Forward-Looking Investment Behaviour," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(4), pages 499-516.
    33. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    34. repec:tpr:journl:edfpol:v:14:y:2015:i:2:p:163-175 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ahmad, Muhammad Farooq & Aziz, Saqib & El-Khatib, Rwan & Kowalewski, Oskar, 2023. "Firm-level political risk and dividend payout," International Review of Financial Analysis, Elsevier, vol. 86(C).
    2. Mahmoud Arayssi & Ali Fakih & Nathir Haimoun, 2019. "Did the Arab Spring reduce MENA countries’ growth?," Applied Economics Letters, Taylor & Francis Journals, vol. 26(19), pages 1579-1585, November.
    3. Oualid Lajili and Philippe Gilles, 2018. "Financial Liberalization, Political Openness and Growth in Developing Countries: Relationship and Transmission Channels," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 43(1), pages 1-27, March.
    4. Bitar, Mohammad & Hassan, M. Kabir & Walker, Thomas, 2017. "Political systems and the financial soundness of Islamic banks," Journal of Financial Stability, Elsevier, vol. 31(C), pages 18-44.
    5. Al-Shboul, Mohammad & Maghyereh, Aktham & Hassan, Abul & Molyneux, Phillip, 2020. "Political risk and bank stability in the Middle East and North Africa region," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    6. Qian, Xianhang & Qiu, Shanyun, 2023. "Political risk and corporate international supply chain," Journal of International Money and Finance, Elsevier, vol. 137(C).
    7. Belkhir, Mohamed & Boubakri, Narjess & Grira, Jocelyn, 2017. "Political risk and the cost of capital in the MENA region," Emerging Markets Review, Elsevier, vol. 33(C), pages 155-172.
    8. Arayssi, Mahmoud & Fakih, Ali, 2017. "Finance–growth nexus in a changing political region: How important was the Arab Spring?," Economic Analysis and Policy, Elsevier, vol. 55(C), pages 106-123.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kwabi, Frank Obenpong & Boateng, Agyenim & Wonu, Chizindu & Kariuki, Charles & Du, Anna, 2023. "Political uncertainty and cross-border equity portfolio allocation decisions: International evidence," International Review of Financial Analysis, Elsevier, vol. 87(C).
    2. Arayssi, Mahmoud & Fakih, Ali, 2017. "Finance–growth nexus in a changing political region: How important was the Arab Spring?," Economic Analysis and Policy, Elsevier, vol. 55(C), pages 106-123.
    3. Drobetz, Wolfgang & El Ghoul, Sadok & Guedhami, Omrane & Janzen, Malte, 2018. "Policy uncertainty, investment, and the cost of capital," Journal of Financial Stability, Elsevier, vol. 39(C), pages 28-45.
    4. Rony Pshisva & Gustavo A. Suarez, 2006. "'Captive markets': the impact of kidnappings on corporate investment in Colombia," Finance and Economics Discussion Series 2006-18, Board of Governors of the Federal Reserve System (U.S.).
    5. Samer Matta & Simon Appleton & Michael Bleaney, 2019. "The Impact of the Arab Spring on the Tunisian Economy," The World Bank Economic Review, World Bank, vol. 33(1), pages 231-258.
    6. Herrala, Risto, 2014. "Forward-looking reaction to bank regulation," Working Paper Series 1645, European Central Bank.
    7. Ma, Huanyu & Hao, Dapeng, 2022. "Economic policy uncertainty, financial development, and financial constraints: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 368-386.
    8. Feldman, David & Kang, Chang-Mo & Li, Jiaming & Saxena, Konark, 2021. "Politically motivated corporate decisions as tournament participation/inclusion games," Journal of Corporate Finance, Elsevier, vol. 67(C).
    9. 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.
    10. Zhu, Qi & Jin, Sisi & Huang, Yuxuan & Yan, Cheng & Chen, Chuanglian, 2022. "Oil price uncertainty and stock price informativeness: Evidence from investment-price sensitivity in China," International Review of Financial Analysis, Elsevier, vol. 84(C).
    11. Tung Nguyen & Dimitris Petmezas & Nikolaos Karampatsas, 2023. "Does Terrorism Affect Acquisitions?," Management Science, INFORMS, vol. 69(7), pages 4134-4168, July.
    12. Wadhwa, Kavita & Syamala, Sudhakara Reddy, 2023. "Are business groups different from other family firms? Evidence from corporate investments during political uncertainty," Emerging Markets Review, Elsevier, vol. 54(C).
    13. Panagiotidis, Theodore & Printzis, Panagiotis, 2020. "What is the investment loss due to uncertainty?," Global Finance Journal, Elsevier, vol. 45(C).
    14. Adra, Samer & Gao, Yang & Huang, Jin & Yuan, Jiayi, 2023. "Geopolitical risk and corporate payout policy," International Review of Financial Analysis, Elsevier, vol. 87(C).
    15. Cao, Dan & Lorenzoni, Guido & Walentin, Karl, 2019. "Financial frictions, investment, and Tobin’s q," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 105-122.
    16. Marcelin, Isaac & Stephen, Sheryl-Ann K. & Fanta, Fassil & Tecklezion, Mussie, 2019. "Political regimes, investment and electoral uncertainty," Research in International Business and Finance, Elsevier, vol. 47(C), pages 580-599.
    17. Jens, Candace E., 2017. "Political uncertainty and investment: Causal evidence from U.S. gubernatorial elections," Journal of Financial Economics, Elsevier, vol. 124(3), pages 563-579.
    18. Bougheas, Spiros & Mizen, Paul & Yalcin, Cihan, 2006. "Access to external finance: Theory and evidence on the impact of monetary policy and firm-specific characteristics," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 199-227, January.
    19. Yin, Doudou & Si, Deng-Kui & Wang, Yun, 2024. "How does corporate investment respond to trade policy uncertainty in China? The role of political connections," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 1429-1445.
    20. Sai Ding & Minjoo Kim & Xiao Zhang, 2021. "New Insight on Investment-Cash Flow Sensitivity," Working Papers 2021_16, Business School - Economics, University of Glasgow.

    More about this item

    Keywords

    MENA countries; Capital accumulation; Political stability;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H1 - Public Economics - - Structure and Scope of Government
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:64:y:2016:i:c:p:1-15. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.