Stock liquidity and firm-level political risk

Firm‐level political risk and implied cost of equity capital

“…In doing so, as expected PRISK loads with a coefficient of 0.0738, which is significant at 1% level satisfying condition (i.). In Model 2, in regressing Δ ILLIQUDITY ( as dependent variable ) on PRISK, keeping the same controls and effects, PRISK loads with a positive and significant coefficient versus Δ ILLIQUDITY suggesting the firm‐level political risk positively contributes to stock illiquidity consistent with Das and Yaghoubi (2023), which satisfies the condition (ii.). In Model 3, in regressing IRP T+0.5 on PRISK and Δ ILLIQUDITY , keeping the same controls and effects as in Models 1 and 2, Δ ILLIQUDITY loads with a positive and significant coefficient as expected.…”

“…( level political risk positively contributes to stock illiquidity consistent with Das and Yaghoubi (2023), which satisfies the condition (ii.). In Model 3, in regressing IRP T+0.5 on PRISK and ΔILLIQUDITY, keeping the same controls and effects as in Models 1 and 2, ΔILLIQUDITY loads with a positive and significant coefficient as expected.…”

“…The empirical findings of Hassan et al (2019) suggest that an increase in firm‐level political risk spurs volatility in firms' stock returns and suppresses investments, capital budgets and hiring. Among studies that use Hassan et al's proxy of political risk Choi et al (2021) corroborate the finding that firm‐level political risk depresses investments; Gad et al (2021) find lenders adjust interest rates in response to changes in borrowers' political risk; Das and Yaghoubi (2023) show firm‐level political risk reduces stock liquidity; Islam et al (2022) show distance to default decreasing in firm‐level political risk; and Ho et al (2022, p. 1) show “ political risk premium of about 0.30% per month in the equity option market .” While evidence on the firm‐level political risk is largely limited to handful of studies, a significant strand of literature examines the firm‐level outcomes of aggregate political risk or policy uncertainty. For example, political and regulatory uncertainty depresses mergers and acquisitions (M&A) activity within firm and in the economy (Bonaime et al, 2018); economic policy uncertainty exerts a positive impact on future market returns (Brogaard & Detzel, 2015); political risk positively affects industry return volatility (Boutchkova et al, 2011); firms reduce investments in response to policy uncertainty during election years (Julio & Yook, 2012); during gubernatorial election years, firms headquartered in those states reduce IPO activity (Colak et al, 2016); and policy uncertainty lowers M&As and takes longer time to complete M&A transactions, discouraging corporate investments (Nguyen & Phan, 2017).…”

“…Based on the arguments and empirical findings of Pástor and Veronesi (2012, 2013), Kogan and Papanikolaou (2013, 2014), Dittmar and Lundblad (2017), Francis et al (2014), Das and Yaghoubi (2023) and Islam et al (2022), I argue that firms have asymmetric exposure to economywide political and policy risk that is reflected in their firm‐level political risk with implications for investors required rate of returns, as such:Hypothesis Firms' implied cost of equity is increasing in the firm‐level political risk.…”

“…Likewise, the firm‐level political risk may exacerbate stock illiquidity by reducing demand for such stocks. In this context, Das and Yaghoubi (2023) show illiquidity increases with the firm‐level political risk. Evidence suggests market commands an illiquidity premium to compensate for asset illiquidity at country level (Amihud & Mendelson, 1986; Pástor & Stambaugh, 2003, among others) as well as globally (Amihud et al, 2015).…”