Political uncertainty and stock returns: evidence from the Brazilian political crisis

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Abstract

This paper examines the effect of political uncertainty on stock returns, exploiting an exogenous shock to political stability in Brazil. In May, 2017, a conversation between Brazil's President and a businessman was bugged by Brazilian Police and leaked to the media. This led to sudden political instability and a collapse in the equity market. We decompose the cross-sectional variation of abnormal returns around this event and investigate whether corporate political connections and exposure to foreign capital were factors in the price falls. Our results show that firms connected with the Brazilian state-owned development bank, BNDES, and firms cross-listed via ADRs (American Depositary Receipts) were most affected by this shock. The evidence suggests that political connections and foreign capital exposure are factors in channeling political risk to asset prices, increasing the cost of equity capital during periods of political instability.
LanguageEnglish
Pages1-12
Number of pages12
JournalPacific-Basin Finance Journal
Volume54
Early online date22 Jan 2019
DOIs
Publication statusPublished - 1 Apr 2019

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Political instability
Foreign capital
Factors
Stock returns
Political connections
Political uncertainty
Brazil
Equity markets
Asset prices
Abnormal returns
Political stability
American depositary receipts
Police
Cost of equity capital
Exogenous shocks
Political risk

Keywords

  • political uncertainty
  • stock returns
  • corporate political connections
  • foreign capitals

Cite this

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title = "Political uncertainty and stock returns: evidence from the Brazilian political crisis",
abstract = "This paper examines the effect of political uncertainty on stock returns, exploiting an exogenous shock to political stability in Brazil. In May, 2017, a conversation between Brazil's President and a businessman was bugged by Brazilian Police and leaked to the media. This led to sudden political instability and a collapse in the equity market. We decompose the cross-sectional variation of abnormal returns around this event and investigate whether corporate political connections and exposure to foreign capital were factors in the price falls. Our results show that firms connected with the Brazilian state-owned development bank, BNDES, and firms cross-listed via ADRs (American Depositary Receipts) were most affected by this shock. The evidence suggests that political connections and foreign capital exposure are factors in channeling political risk to asset prices, increasing the cost of equity capital during periods of political instability.",
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AB - This paper examines the effect of political uncertainty on stock returns, exploiting an exogenous shock to political stability in Brazil. In May, 2017, a conversation between Brazil's President and a businessman was bugged by Brazilian Police and leaked to the media. This led to sudden political instability and a collapse in the equity market. We decompose the cross-sectional variation of abnormal returns around this event and investigate whether corporate political connections and exposure to foreign capital were factors in the price falls. Our results show that firms connected with the Brazilian state-owned development bank, BNDES, and firms cross-listed via ADRs (American Depositary Receipts) were most affected by this shock. The evidence suggests that political connections and foreign capital exposure are factors in channeling political risk to asset prices, increasing the cost of equity capital during periods of political instability.

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