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Stock Liquidity and Firm-Level Political Risk

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Abstract
Exploiting a novel measure of firm-level political risk based on earnings conference calls, we examine the effect of firm-level political risk on stock liquidity. We show that liquidity decreases significantly more in firms that are exposed to political risk. An increase in firm-level political risk by one standard deviation lowers liquidity by around 3.64%. We further investigate whether the effect of firm-level political risk on stock liquidity can be mitigated or exacerbated by the political environment of the U.S. economy and find some evidence of the Democratic liquidity premium. Our results are robust to alternative measures of (il)liquidity, and an estimation method.

Suggested Citation

  • Kuntal K. Das & Mona Yaghoubi, 2022. "Stock Liquidity and Firm-Level Political Risk," Working Papers in Economics 22/18, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:22/18
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    Cited by:

    1. Das, Kuntal K. & Yaghoubi, Mona, 2024. "Migration fear and stock price crash risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    2. Kim, Jang-Chul & Mazumder, Sharif & Su, Qing, 2024. "Brexit's ripple: Probing the impact on stock market liquidity," Finance Research Letters, Elsevier, vol. 61(C).
    3. Yaghoubi, Mona, 2024. "Executive characteristics as moderators: Exploring the impact of geopolitical risk on capital structure decisions," International Review of Financial Analysis, Elsevier, vol. 93(C).
    4. Olayinka Oyekola & Meryem Duygun & Samuel Odewunmi & Temitope Fagbemi, 2023. "Political risk and external finance: Evidence from cross-country firm-level data," Discussion Papers 2312, University of Exeter, Department of Economics.
    5. Wang, Liang, 2023. "Mitigating firm-level political risk in China: The role of multiple large shareholders," Economics Letters, Elsevier, vol. 222(C).
    6. Safiullah, Md & Kabir, Md. Nurul, 2024. "Corporate political risk and environmental performance," Global Finance Journal, Elsevier, vol. 60(C).
    7. Fiorillo, Paolo & Meles, Antonio & Pellegrino, Luigi Raffaele & Verdoliva, Vincenzo, 2023. "Geopolitical risk and stock liquidity," Finance Research Letters, Elsevier, vol. 54(C).
    8. Clancey-Shang, Danjue & Fu, Chengbo, 2024. "CSR disclosure, political risk and market quality: Evidence from the Russia-Ukraine conflict," Global Finance Journal, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Stock liquidity; political risk;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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