Measuring political leader's geopolitical risk perceptions

Abstract

Does a political leader's perception of geopolitical risk influence the real economy? If so, to what extent and through what mechanisms? Using local-language sources, we explore these questions by constructing a geopolitical risk index based on textual data from statements made by Chinese President Xi Jinping and examining its relationship to firms' investment behavior in China. The index shows notable spikes in April 2016, June 2018, and April 2022, corresponding to terrorist attacks in neighboring countries, U.S.-China tensions, and the Russia-Ukraine war. We find that an increase in the geopolitical risk index is associated with a decline in firms' investment rates. Specifically, a 100 % increase in the index leads to a 14.1 % reduction in investment. Notably, while firms with high effective interest rates and greater exposure to international trade are adversely affected by the geopolitical risk, politically connected firms are less affected, indicating their ability to mitigate its negative effects. Our findings advance the geopolitical risk literature by highlighting the role of political leaders' perceptions, utilizing local sources to measure this factor, and examining the moderating effect of political connections under geopolitical risks.