Political Risk and International Valuation

54 Pages Posted: 18 Mar 2012 Last revised: 11 Sep 2015

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Stephan Siegel

University of Washington - Michael G. Foster School of Business; CESifo

Date Written: September 7, 2015

Abstract

Measuring the impact of political risk on investment projects is one of the most vexing issues in international business. One popular approach is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is awed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis - leading to the double counting of risks. We propose to use “political risk spreads” to undo the double counting in the evaluation of international investment projects.

Related Research: Political Risk Spreads http://ssrn.com/abstract=2361472

Keywords: Political risk, sovereign spread, sovereign risk, capital budgeting, international cost of capital, project evaluation.

JEL Classification: F21, F23, F36, G15, G31, H25, K33, M21, O16, O19

Suggested Citation

Bekaert, Geert and Harvey, Campbell R. and Lundblad, Christian T. and Siegel, Stephan, Political Risk and International Valuation (September 7, 2015). Available at SSRN: https://ssrn.com/abstract=2022652 or http://dx.doi.org/10.2139/ssrn.2022652

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Stephan Siegel (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://faculty.washington.edu/ss1110/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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