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The impact of political uncertainty on the cost of capital

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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.

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Notes

  1. Following Damodaran (2012), we use the US as our base matured country.

  2. Political system takes a value of 1 if the country practices presidential system of election otherwise 0.

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Authors and Affiliations

  1. Department of Accounting and Finance, Leeds Business School, Leeds Beckett University, Leeds, LS1 3HE, England

    Frank Kwabi & Agyenim Boateng

  2. College of Business, Law and Social Sciences, University of Derby, Derby, DE22 1GB, England

    Andrews Owusu

  3. Edinburgh Business School, Heriot Watt University, Edinburgh, EH14 4AS, Scotland

    Ernest Ezeani

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  1. Frank Kwabi
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  2. Andrews Owusu
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  3. Ernest Ezeani
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  4. Agyenim Boateng
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Correspondence to Frank Kwabi.

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Appendix

Appendix

See Table 11.

Table 11 Definitions of variables
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Kwabi, F., Owusu, A., Ezeani, E. et al. The impact of political uncertainty on the cost of capital. Rev Quant Finan Acc 62, 1397–1429 (2024). https://doi.org/10.1007/s11156-023-01236-2

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