The Management of Political Risk

11 Pages Posted: 24 Apr 2018

See all articles by Erasmo Giambona

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Campbell Harvey

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

We explore a long-standing prediction in the international business literature that managers’ subjective perceptions of political risk – not just the level of risk – are important for how firms manage political risk. The importance attributed to political risk by corporate executives has increased over the last 15 years and our results show that political risk is now considered more important than commodity (input) risk. Our analysis suggests that nearly 50% of firms avoid (not simply reduce) foreign direct investment because of political risk. Using a unique survey-based psychometric evaluation of manager risk aversion, we show that firms with risk averse executives are more likely to avoid investment in politically risky countries – a key implication of behavioral models. This relation is economically stronger when agency problems are more likely to be severe: for example, when executives are less aligned with shareholder value maximization, and when executives are younger (and therefore might put their personal career concerns in front of shareholders’ interests). While numerous studies have shown that political risk affects foreign direct investment using objective measures of such risk (electoral uncertainty, conflicts, etc.), our study documents that executives’ subjective perceptions of political risk are also important for political risk management.

Keywords: political risk, risk management, hedging, real options, cost of capital, derivatives, investment, foreign direct investment, risk aversion, behavioral theory, agency theory, economic growth, FDI, ISDA, GARP, survey method, probit model

Suggested Citation

Giambona, Erasmo and Harvey, Campbell, The Management of Political Risk (February 2017). Journal of International Business Studies, Vol. 48, Issue 4, 2017, Available at SSRN: https://ssrn.com/abstract=3160757 or http://dx.doi.org/10.1057/s41267-016-0058-4

Erasmo Giambona (Contact Author)

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 640
Syracuse, NY 13244-2450
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Campbell Harvey

affiliation not provided to SSRN

No Address Available

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