The Cost of Political Risk Events: Variation by Risk Class, Exposure and Asset Specificity

We extend recent advances in political risk research by devising daily text-based measures of a wide array of political risks in 75 countries from 2013-2020. We identify structural breaks in these country-day data series which yield a population of thousands of discrete political risk events. We estimate the cumulative abnormal returns associated with such events for the 729 firms in the S&P 500 inclusive over that time period with substantial operations in the countries in which the events occurred. We then demonstrate that the magnitude of these negative returns varies by political risk class, exposure and asset specificity. Specifically, political risk events associated with policy, government and institutional stability are viewed as more material by investors
than are events associated with security, social polarization or economic development. Next, we show that firms with greater exposure to a country experiencing a given political risk event suffer greater losses. Finally, we show that these losses also vary across industries in a manner consistent with variation in the level of asset specificity. Our analyses and methodology offer substantial promise in shifting the focus of political risk research from the demonstration of financial impacts to the identification and assessment of the efficacy of managerial responses to mitigate those impacts.