Geopolitical risks and asset prices: Wealth effects of delisting regulation on Chinese companies listed on the U.S. exchanges

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Abstract

This study investigates the shareholder wealth effect of the passage of de-listing regulation on Chinese companies listed on the U.S. stock exchanges. Using a standard event study methodology similar to Dodd and Warner (1983) and Travlos (1987), we study three events leading up to the passage and the signing of the Holding Foreign Companies Accountable Act (HFCAA). The HFCAA mandates companies to provide assurance that they are not owned or controlled by a foreign government. In addition, the law requires that these companies provide access to the U.S. Public Company Accounting Oversight Board (PCAOB) to examine their financial audits. The results of our study show a significant negative wealth effect around three test events for a sample of Chinese companies listed on U.S. stock exchanges. These findings suggest that geopolitical tensions significantly affect firm value, thus affirming the notion that bilateral or multilateral tensions, once translated in to policy changes, do trickle down to the individual firm level, thereby providing direct evidence of the link between geopolitical uncertainty (risk) and asset prices. These results contribute to and extend the growing body of literature (Egger & Zhu, 2020) on geopolitical tensions and stock returns. Our findings have implications for those nations’ economies that are, directly or indirectly, a party to similar geopolitical alignments or rivalries.

Keywords: Geopolitical Risk, Asset Prices, Economics of Regulation, Financial Markets, Chinese Companies, Delisting, Regulation, U.S. Foreign Policy, Event Study

Authors’ individual contribution: Conceptualization — W.G. and A.M.; Methodology — W.G. and A.M.; Software — W.G. and A.M.; Validation — W.G. and A.M.; Formal Analysis — W.G. and A.M.; Investigation — W.G. and A.M.; Writing — Original Draft — W.G. and A.M.; Writing — Review & Editing — W.G. and A.M.; Supervision — W.G. and A.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G11, G12, G14, G18

Received: 28.07.2022
Accepted: 10.10.2022
Published online: 12.10.2022

How to cite this paper: Ghani, W., & Margam, A. (2022). Geopolitical risks and asset prices: Wealth effects of delisting regulation on Chinese companies listed on the U.S. exchanges. Risk Governance and Control: Financial Markets & Institutions, 12(3), 61–73. https://doi.org/10.22495/rgcv12i3p5