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Economic policy uncertainty and cost of capital: the mediating effects of foreign equity portfolio flow

Abstract

We investigate whether economic policy uncertainty and the interaction of foreign equity portfolio flow and economic policy uncertainty impact the cost of capital. Using panel data of 20 countries from 2001 to 2018, we find economic policy uncertainty to exert a positive effect on the cost of capital. However, the interaction between foreign equity portfolio flow and economic policy uncertainty has a negative effect on the cost of capital, demonstrating that, the combined effect of foreign equity portfolio flow and economic policy uncertainty has the opposite effect (i.e., reduces the cost of capital). Our results are robust to alternative specifications and endogeneity.

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Notes

  1. Foreign equity portfolio flow is the inflow of foreign equity investment into the destination or host country.

  2. We limit this study to the role of foreign equity portfolio flow on cost of capital. We do not examine factors that attract foreign equity portfolio flow on the cost of capital.

  3. Please see Political Risk Services of International Country Risk Group (ICRG) for computation of financial risk, political risk, and economic risk measures.

  4. Unreported Haussmann test shows that the fixed effects is more suitable than the random effects estimation model.

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Correspondence to Frank Obenpong Kwabi.

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Appendix

Appendix

See Table 10.

Table 10 Definitions of variables

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Obenpong Kwabi, F., Owusu-Manu, S., Boateng, A. et al. Economic policy uncertainty and cost of capital: the mediating effects of foreign equity portfolio flow. Rev Quant Finan Acc 59, 457–481 (2022). https://doi.org/10.1007/s11156-022-01046-y

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Keywords

  • Cost of capital
  • Economic policy uncertainty
  • Foreign equity portfolio flow
  • Cross country evidence

JEL Classification

  • A11
  • D24
  • D81