Political Risk and the Cost of Capital in the MENA Region
41 Pages Posted: 30 Aug 2017
Date Written: August 28, 2017
We examine the impact of political risk in the MENA region on the cost at which firms can raise capital. Using the implied cost of equity as a measure of the cost of capital and ICRG’s political risk rating as a proxy for political risk, we find that political risk results in a higher cost of capital. Economically, our results suggest that a one standard deviation increase in the political risk index is associated with a 450 basis points increase in the cost of equity capital of MENA firms. Our results are consistent across a battery of robustness checks. Our findings have important policy implications that are relevant to the MENA region and beyond.
Keywords: Political risk, Institutions, cost of capital, MENA, investment
JEL Classification: G11, G32, G38
Suggested Citation: Suggested Citation