The Impacts of Political Uncertainty on Asset Prices: Evidence from a Natural Experiment

Models for political uncertainty risk predict that increases in political uncertainty will cause stock prices to fall, especially for politically sensitive firms. We use the Bo Xilai political scandal in China in 2012 as a natural experiment to identify the impact of political uncertainty on asset prices. We document that the Bo scandal caused a much more significant drop in the stock prices of firms that were more politically sensitive. Further analysis shows that our evidence is mainly driven by the change in discount rate, providing strong support for the existence of political uncertainty risk.