Abstract
This paper investigates the relationship between liquidity, information asymmetry, political risk rating, government and regulatory quality rating for non-U.S. stocks in the energy industries listed on the New York Stock Exchange (NYSE). Our findings indicate that stocks from countries with higher government and regulatory quality and lower political risk tend to have narrower spreads, a smaller price impact of trades, and a higher market quality index. To explore the impact of political risk on liquidity and information asymmetry, we analyze political shocks resulting from the U.S.-China trade conflict on Chinese energy stocks. Our findings reveal that whenever the U.S.-China political tension escalates over trade policy, the market liquidity and information asymmetry for Chinese energy stocks worsen. This suggests that negative shocks have a detrimental impact on the liquidity of stocks from countries where political tension is escalated.
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The datasets generated and analyzed during the current study are not publicly available due to the fact that they constitute an excerpt of research in progress but are available from the corresponding author on reasonable request.
Notes
Other industries, such as utilities and banking, are also subject to substantial regulations. It is worth noting that the utility industry, by its nature of natural monopoly, is typically domestically or locally oriented and lacks the extensive interconnectivity that characterizes the energy industry on a global scale. On the other hand, banking operates under a distinct regulatory framework with a greater emphasis on credit dynamics rather than facing the same level of exposure to political tensions and regulatory nuances as the energy sector, which is the primary focus of our research. Our intention is not to downplay the importance of regulation in other industries but rather to emphasize the complexities and dynamics inherent to energy stocks due to these unique characteristics.
Moreover, it is important to recognize that numerous studies explore the impact of specific events or political factors on one specific industry. For instance, Delis et al. (2020) investigate how a country's level of democracy influences bank financing costs, while Liu et al. (2021) analyze the effects of hurricanes on energy stock market returns. Similarly, Kim and Su (2023) delve into the liquidity implications of Hurricane Sandy on the utility industry. These examples demonstrate the diversity of research questions, designs, and methodologies employed across different studies, each tailored to its respective industry and context.
For example, macroeconomic policy uncertainty (Jens 2017; Zhang et al. 2023; Wang et al. 2022; Dash et al. 2021; Debata and Mahakud 2018; Guiso et al., 2009; Julio and Yook 2012; Firoillo et al., 2023), culture (Chui et al., 2002; Guiso et al., 2009; Zheng et al., 2012), and trust (Blau 2017; Duarte et al. 2012; Eleswarapu and Venkataraman 2006; Mazumder and Rao 2023).
Note that the realized spread is equal to the difference between the effective spread and the price impact of trades, all expressed in dollars: 2Di,t (Pi,t – Mi,t+5) = 2Di,t (Pi,t – Mi,t) – 2Di,t(Mi,t+5 – Mi,t).
The EKOP model assumes that buy and sell orders from uninformed traders are equally likely.
We do not use firm fixed effects regression as there is little variation in country quality ratings over time. Instead, we use year-fixed effects regressions to control for unobserved variables that vary across years. This approach allows us to control for factors that affect all firms in a particular year.
An ideal scenario would be that the control group perfectly mirrors the target group, differing only in sector classification. However, practical considerations related to data availability and the distribution of stocks across countries, particularly within the NYSE, present substantial challenges. The energy sector exhibits notable heterogeneity, and the representation of non-U.S. energy stocks on the NYSE varies significantly across countries. This makes achieving an exact one-to-one match impractical without substantially reducing the sample size, which would compromise the statistical power and representativeness of our results.
Our event period begins in July 2018 and ends in October 2019, a few months before the COVID-19 pandemic.
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Kim, JC., Su, Q. Political ratings, government quality, and liquidity: evidence from Non-U.S. energy stocks listed on the NYSE. J Econ Finan (2024). https://doi.org/10.1007/s12197-024-09666-x
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DOI: https://doi.org/10.1007/s12197-024-09666-x