Geopolitical risk and the cost of capital in emerging economies

Abstract

We posit that geopolitical events that elevate investor risk prompt equity investors to shift capital from emerging markets to safer mature markets, raising the cost of equity capital for firms in emerging economies. Using a sample of 55,900 observations spanning 19 economies from 1987 to 2018, we find that higher geopolitical risk increases the cost of equity capital, on average. We further find that this effect is moderated by country-level institutional context (constraints on the executive branch of government and regulatory arrangements) and firm-level factors (cross-listing in the U.S. and foreign sales).