Working Paper: NBER ID: w29280
Authors: Elisabeth Kempf; Mancy Luo; Larissa Schäfer; Margarita Tsoutsoura
Abstract: 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.
Keywords: Political Ideology; International Capital Allocation; Syndicated Corporate Loans; Equity Mutual Funds
JEL Codes: G11; G15; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in ideological distance (P39) | Reduction in lending volume (G21) |
| Increase in ideological distance (P39) | Reduction in number of loans (G51) |
| Increase in ideological distance (P39) | Increase in loan spreads (G21) |
| Increase in ideological distance (P39) | Reduction in portfolio allocation to that country (F32) |
| Increase in ideological distance (P39) | Downward revision of GDP growth forecasts (H68) |
| Ideological distance (P39) | Negative correlation with size of bilateral portfolio positions (G15) |