Do U.S. Institutional investors react to international politics?

Abstract

This study explores whether foreign policy disagreements with the United States affect overseas portfolio investment decisions of U.S. institutional investors. Employing bilateral disagreement measures derived from contrasting voting decisions at the United Nations (UN) General Assembly, we find strong empirical evidence affirming this connection. We find a drop in U.S. institutional ownership in non-U.S. firms if the country they are listed in undergoes a downturn in their political relations with the U.S. Furthermore, our research unveils that this reduced U.S. institutional ownership primarily originates from investors’ reluctance to allocate capital to firms generating operating income in the U.S. Our results are further substantiated through Difference-in-Differences analyses centered around France and Germany’s opposition to the U.S.-initiated Iraq incursion in January 2003. Firms based in France and Germany experience a reduction in U.S. institutional holdings, accompanied by a decline in analyst earnings per share (EPS) forecasts. Lastly, we find that political tensions between the U.S. and a foreign nation negatively impact the valuation of firms based in that foreign country, with this effect primarily driven by divestment actions undertaken by U.S. institutional investors.