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Does geopolitical risk affect firms' idiosyncratic volatility? Evidence from China

Lookup NU author(s): Dr Jose LiuORCiD

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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License (CC BY-NC 4.0).

Abstract

Using 2663 Chinese A-share listed companies from 2003 to 2019, we investigate the relationship between geopolitical risk (GPR) and firm idiosyncratic volatility through panel fixed effects and attempt to explain the mechanism. The main findings are presented as follows. First, GPR can explain the change of firms' idiosyncratic volatility. Different industry conditions and ownerships have heterogeneous effects on the firms' idiosyncratic volatilities. In addition, the interaction terms of ownership concentration, competitive intensity and operating leverage with GPR are statistically significant, and they interact with GPR to affect firms' idiosyncratic volatility. After we conduct a series of robustness tests using methods such as instrumental variables, we innovatively introduce the South China Sea dispute as an external event and use the DID (Difference-in-difference) model to analyze the impact of geopolitical events on corporate risk-taking, our findings remain valid. Our research contributes to a better understanding of geopolitical risk and firms' idiosyncratic volatility.

Publication metadata

Author(s): Ren X, Cao Y, Liu PJ, Han D

Publication type: Article

Publication status: Published

Journal: International Review of Financial Analysis

Year: 2023

Volume: 90

Pages: 102843

Print publication date: 01/11/2023

Online publication date: 04/08/2023

Acceptance date: 01/08/2023

Date deposited: 21/11/2023

ISSN (print): 1057-5219

ISSN (electronic): 1873-8079

Publisher: Elsevier

URL: https://doi.org/10.1016/j.irfa.2023.102843

DOI: 10.1016/j.irfa.2023.102843

Data Access Statement: Data will be made available on request.

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