Political Ideology and International Capital Allocation
Does investors' political ideology shape international capital allocation? We provide evidence from two settings–syndicated corporate loans and equity mutual funds–to show ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Ideological alignment on both economic and social issues plays a role. Our empirical strategy ensures direct economic effects of foreign elections or government ties between countries are not driving the result. Ideological distance between countries also explains variation in bilateral investment. Combined, our findings imply ideological alignment is an important, omitted factor in models of international capital allocation.
We are grateful for comments from Tobias Berg, Filippo De Marco (discussant), Mariassunta Giannetti (discussant), Laurence van Lent, Raghuram Rajan, Antoinette Schoar, Roger Silvers, Noah Stoffman (discussant), Simon Strautmann (discussant), Felix von Meyerinck, and seminar/conference participants at Bank of Portugal, Boston College, Central Bank of Ireland, DGF 2021, Durham University, Emory University, ESCP Business School Berlin, Frankfurt School of Finance & Management, Goethe (SAFE) University, Indiana University, JEF Seminar, LUISS University, POLFIN Workshop London, Texas Finance Festival, University of Bristol, University of Southampton, and University of Tübingen. Kempf gratefully acknowledges financial support from the Initiative on Global Markets and the Fama-Miller Center for Research in Finance at Chicago Booth. We thank Xinyu Cao, Emirhan Ilhan, Zichen Zhao and, especially, Laurenz De Rosa for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Elisabeth Kempf & Mancy Luo & Larissa Schäfer & Margarita Tsoutsoura, 2023. "Political ideology and international capital allocation," Journal of Financial Economics, vol 148(2), pages 150-173.