Political uncertainty and cross-border equity allocation decisions: international evidence

Kwabi, Frank; Boateng, Agyenim; Wonu, Chizindu; Kariuki, Charles; Du, Anna

Abstract

Political risk models highlight that political uncertainty matters for corporate investment decisions. However, how political uncertainty matters for investment allocation decisions is relatively under-explored. In this study, we examine the impact of political uncertainty associated with national elections on foreign equity portfolio in 48 countries. Our results indicate that political uncertainty reduces international equity allocations to the host country and such reduction appears more pronounced in the election year. Further analysis shows that the interaction between political uncertainty and institutional quality has a positive and significant effect on international equity portfolio flow, suggesting that the value of institutional quality outweighs the negative effects of political uncertainty. Lastly, we find equity home bias to be negative and significant; however, the interaction between political uncertainty and equity home bias appears insignificant.

Citation

Kwabi, F., Boateng, A., Wonu, C., Kariuki, C., & Du, A. (2023). Political uncertainty and cross-border equity allocation decisions: international evidence. International Review of Financial Analysis, 87, Article 102562. https://doi.org/10.1016/j.irfa.2023.102562

• Journal Article Type: Article
• Acceptance Date: Feb 1, 2023
• Online Publication Date: Feb 4, 2023
• Publication Date: 2023-05
• Deposit Date: Feb 4, 2023
• Publicly Available Date: Aug 5, 2024
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Electronic ISSN: 1873-8079
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 87
• Article Number: 102562
• DOI: https://doi.org/10.1016/j.irfa.2023.102562
• Keywords: Political uncertainty, Election uncertainty, Foreign equity portfolio flow, Institutional quality