Abstract. We study the role of bilateral political relations in explaining variations in the equity portfolio allocation of foreign institutional investors. Using a large sample at the fund-firm-year level, we find that political distance between countries leads to significant retrenchment of foreign institutional investors from local firms. Consistent with our theorized channels, we find that the effect is stronger for stocks that are more exposed to geopolitical risk, dividend-paying, and less liquid, as foreign investors sell off local securities that become riskier to hold. Overall, our findings provide novel micro evidence on the impact of geopolitical risk on international equity markets.
Coauthor. Stefano Lugo (U Utrecht).
Manuscript. You can download the paper here.
Presentations. The AfriMed conference at the University of Valencia, the Australasian Finance and Banking Conference at UNSW Business School, the Financial Management Association meetings at Aalborg University, and the Financial Markets and Corporate Governance conference at Deakin University.