Foreign Risk - Domestic Problem: Trade, Politics, and Capital Allocation
43 Pages Posted: 2 Sep 2011 Last revised: 27 Aug 2019
Date Written: August 28, 2011
We argue that international trade is a significant conduit of foreign political uncertainty into U.S. markets. We find that industries that export considerable shares of their output to countries with high political risk or countries that hold national elections in a given year experience suboptimal investment efficiency, slower total factor productivity growth, lower valuation, and worse accounting performance. Our results are not driven by economic risk or the quality of institutional environment of trading-partner countries, and they remain robust when we account for potential endogeneity of export flows.
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