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Domestic Political Risk and Stock Valuation

Tamir Agmon and M. Chapman Findlay
Financial Analysts Journal
Vol. 38, No. 6 (Nov. - Dec., 1982), pp. 74-77
Published by: CFA Institute
Stable URL: http://www.jstor.org/stable/4478601
Page Count: 4
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Domestic Political Risk and Stock Valuation
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Abstract

Although normally applied to international markets in the sense of government expropriation of non-resident investment, there is no reason why political risk cannot occur totally among citizens within a given jurisdiction. Domestic political risk may be thought of as taxation of a politically weak group to benefit a politically powerful group, with the efforts of various groups to improve their relative positions increasing the volatility of changes in relative prices. Domestic political risk--whether it takes the form of regulation, subsidy or even inflation--has implications for share prices. In terms of the traditional equity valuation model, it may either reduce cash flows to the firm or increase investment risk. In either case, the value of assets is reduced. The United States has seen an increase in domestic political risk over the past 15 years. The financial markets have reacted to this trend in a rational manner.

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