Foreign Risk - Domestic Problem: Trade, Capital Allocation, and Performance Under Political Uncertainty
46 Pages Posted: 24 Feb 2012 Last revised: 27 Aug 2019
Date Written: January 30, 2012
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 lower total factor productivity growth, lower valuation, and worse accounting performance. The key channel of political uncertainty transmission is disruption of investment efficiency. 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.
Keywords: Capital Allocation, Political Risk, International Trade
JEL Classification: F10, G32
Suggested Citation: Suggested Citation