Firm-level political risk and implied cost of equity capital

Abstract

I find a strong positive association between firms' implied cost of equity capital and firm-level political risk. This effect is above and beyond the firm-level cost of equity implications of economywide political risk. Firm-level political risk contributes to elevating stock illiquidity, increases dispersion of analyst forecasts and dampens analyst coverage and these attributes, in turn, have positive cost of equity capital implications. Overall, the findings of this study suggest firm-level political risk has a non-trivial effect on increasing equity market illiquidity, increasing dispersion of earnings forecasts and decreasing analyst coverage thus increasing financing costs.