Foreign Risk - Domestic Problem: Trade, Politics, and Capital Allocation

43 Pages Posted: 2 Sep 2011 Last revised: 27 Aug 2019

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Burcin Col

Pace University-Lubin School of Business

Alexander Molchanov

Massey University

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Date Written: August 28, 2011

Abstract

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.

Suggested Citation

Durnev, Artyom and Col, Burcin and Molchanov, Alexander, Foreign Risk - Domestic Problem: Trade, Politics, and Capital Allocation (August 28, 2011). Pace University Finance Research Paper No. 2011/07. Available at SSRN: https://ssrn.com/abstract=1921309 or http://dx.doi.org/10.2139/ssrn.1921309

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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Burcin Col

Pace University-Lubin School of Business ( email )

One Pace Plaza
New York, NY 100038
United States

Alexander Molchanov

Massey University ( email )

Auckland
New Zealand

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