UNIVERSITY OF ECONOMICS AND BUSINESS (UEB) FACULTY OF FINANCE AND BANKING --000-- An empirical study. Teacher instruction : PhD. Vu Quoc Hien Student name : Trinh Thi Phuong Thao Student code : 19050735 Class : QH-2019-E-TCNH-CLC2 Ha Noi - 2023 UNIVERSITY OF ECONOMICS AND BUSINESS (UEB) FACULTY OF FINANCE AND BANKING --0o00— GRADUATION THESIS An empirical study. Ha Noi - 2023 DECLARARTION I hereby declare that this graduation thesis, entitled “Geopolitical risk and capital structure decisions of US firms: An empirical study”, is my own original work, produced with the guidance and support of our supervisor.
Furthermore, I assert that all sources used in this thesis, whether they are primary data or secondary information, have been clearly acknowledged and cited in the appropriate sections of the thesis. I have not knowingly or intentionally included any information that is inaccurate, misleading, or false. Any opinions expressed in this thesis are solely my own and do not represent the views of any other individual or organization. This statement is entirely our responsibility.
Students ACKNOWLEDGEMENTS In order to successfully complete our scientific research paper, we would like to sincerely thank to: First of all, we would like to thank our instructor, Dr. Vu Quoc Hien, who guided us wholeheartedly throughout the process of conducting this scientific research. We thank you for your dedication and willingness to take the time to comment and answer questions about the topic so that we can understand and complete this research paper. We would also like to express our sincere thanks to the teachers in the Faculty of Finance - Banking in particular and all the teachers of the University of Economics - VNU in general for creating learning conditions to help us improve our skills.
self-study ability to complete the research well. Due to limited knowledge and reasoning ability, we cannot avoid certain shortcomings. We look forward to receiving the contributions of teachers to make this scientific research better. Thank you sincerely! ii TABLE OF CONTENTS.- 5-5 «Sen HH HH TH HH HH HH HH HH HHHHHTEESREEEESEESESEESEEEESEiESISEi i ACKNOWLEDGEMERNTTS.
HH HH HH ESRSEESEEEEEESEESESEESEEESESSEEsre ii LIST OF ABBREVIATIONS .ccssssssssseesssesseeessaesnsnsseseseeseesnsneneeeeseeeesaeseesesaeenseeseesesaesesassaeseesnsneseeeseeaess Vv LIST OE TABLES aoe vi ABSTRACT .cccsesscsssessesrseseseseseeeeerseseeeseesesesaeseseeaseeseneeaesesecaeeesenavarsenecaresesacaesenesaeaeseseeaeseneeareeeesaneeeserarenses 1 CHAPTER 1: INTRODUCTTION. Define research objectives and taskS. Research qU€SfIOT.- -< + E1 911 1E HH nu nh 3 1. Research objectives and SCOD€.- -- 5 + SE ke rke 4 1.
Overview of data and research methods. Contribution of reS€arCH. Structure of the SUy. -- c1 x1 ng HH ng re 5 CHAPTER 2: LITERATURE REVIEW.
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54+ 17 CHAPTER 4: RESULTS AND DISCUSSION. Descriptive S{Af{ISẨICS. n1 HT TH HT nh 20 4. G1111 1H HH Họ it 26 4.
GPR and Capital structure by industry .--- «55s 5s ss+sesseeeseees 29 ili 4. The impact of GPR on industries (Health care, Finacial, Industrial, 0001:0117. -- --«- s6 xxx E911 11 11 1 9v ng ngư 43 5. Firm Management 1mpÏICafIOINS.
Limitations and recommendations of the studịy,.ccssssssssssessessseseesesesseeesseesaeaceesaeaeeesnsneaeeeseeaeeesesaeseeesneaeeeseuaeseeesaesesesaeaeeesesaeasseseuseeesenaeaeees 47 iv LIST OF ABBREVIATIONS Abbreviations Full name Debt Ratio Capital structure EIDL Economic Injury Disaster Loans GDP Gross Domestic Product GEPU Global Economic Policy Uncertainty GICS Global Industry Classification Standard GPR Geopolitical risk GPRA Geopolitical risk act GPRC Geopolitical risk country GPRT Geopolitical risk threat PPP Paycheck Protection Program SEC Securities and Exchange Commission US United State LIST OF TABLES. --- 5c c+ th HH HH HH HH Hà HH HH re giờ 22 Table 4. «cà HH HH HH1 gờt 26 Table 4. GPR and Capital structure by indUStTW.
41 vi ABSTRACT Geopolitical risk refers to the potential instability in politics or society in a country or region that could affect economic growth and investment opportunities, thus impacting business decisions. This study investigates the role of geopolitical risk (GPR) in financial leverage decisions across 11 U. economic sectors according to the Global Industry Classification Standards (GICS). The current thesis uses panel data methods and examines 4466 listed companies in the United States from 2003 to 2022The observation also shows that companies in the healthcare, financial, industrial and utilities sectors are positively correlated with GPR, while other sectors are not affected.
Furthermore, the correlated of GPR on the debt ratio of heavily leveraged companies is more significant than other sectors. These results remain unchanged when controlling for relevant macroeconomic factors. Apart from examining the impact of geopolitical risk on financial leverage decisions, this study also investigates how companies adjust their capital structure decisions to respond to changes in GPR. The findings of the research provide valuable insights into how geopolitical risk affects the financial decisions of U.
companies and can help investors and policy makers to effectively manage these risks. As such, this study is expected to have significant implications for companies, investors, and policy makers in the United States and around the world, especially in an increasingly uncertain and volatile geopolitical environment. Overall, this research adds to our understanding of how geopolitical risk can affect businesses and highlights the importance of managing these risks effectively. Geopolitical risk is defined as a risk related to war, terrorism, and tensions between countries that affect normalcy, peace, and international relations.
Recently, GPR has been considered a substitute political risk criterion because it affects broadly. However, it differs significantly from other measures of geopolitical instability and macroeconomic risk. At the micro level, which is the focus of this study, geopolitical risk has become an increasingly important consideration for businesses operating in the current interconnected global economy. The potential for unexpected geopolitical events or international conflicts to disrupt supply chains, impact exchange rates, and create financial market uncertainty can have significant implications for corporate capital structure decisions.
Unfavorable political situations can directly affect a country's economic and commercial activities (Ari Aisen, 2013). Under the impact of events such as terrorist attacks, civil wars, cyberattacks, trade and energy wars, oil supply reductions, and war and conflict-induced migrations, along with economic sanctions and geopolitical tensions, the level of political risk in a country can increase significantly. These events are often external shock factors that increase instability and have negative impacts on the economy (Julio, 2009). Companies exposed to higher levels of geopolitical risk tend to have lower profits, indicating that political risk can affect the cost of equity financing and may affect corporate capital structure decisions (Bansal & KiKu, 2019).
The uncertainty about political risk also increases the incentive to save for businesses and consumers. This reduces investment and consumption, causing a delay in economic growth and increasing market risk. As political uncertainty increases, companies tend to increase their cash holdings in their asset structure and reduce their use of debt to ensure liquidity and financial stability (Bloom, 2009). It is also noteworthy that economies that are more prone to political risk are more fragile economically (Chiu, 2018).
This can lead to decreased productivity, declining stock markets, increased interest rates, and even economic recession. Therefore, understanding the factors that affect a company's financial decisions to cope with political uncertainty can help companies and investors better manage risks and navigate the complex landscape of global politics and finance. This can lead to decreased productivity, declining stock markets, increased interest rates, and even economic recession. Define research objectives and tasks.
Political uncertainty, whether international or domestic, can cause chaos and conflict in financial markets, negatively impacting the economy. In addition, it also affects the financial behavior of companies. According to the (IMF, 2023) and (Narjess Boubakri, 2012), political uncertainty often increases the cost of public debt financing and the cost of private borrowing for companies. Previous studies have shown that companies tend to use more cautious financial strategies to reduce predicted political risks.
This information shows that political uncertainty can have negative consequences for the economy and companies and needs to be tightly managed to minimize its negative impact. The focus of this study is to explore the relationship between geopolitical risk and capital structure decisions of US companies, identifying factors that influence the sensitivity of these decisions to geopolitical risk. Additionally, the study aims to evaluate the effectiveness of different strategies used by various industries in the US to manage geopolitical risk. The research task is to comprehensively evaluate existing literature on political risk and its impact on capital structure decisions of US companies.
Collect data on political risk indices and financial variables of sample companies in the US. Also evaluate the impact of political risk on different components of capital structure, such as debt levels, equity issuance, etc. Test the effectiveness of specific firm-level factors, such as size, industry, and financial flexibility, in relation to the relationship between political risk and capital structure decisions. Draw conclusions and provide recommendations for US companies, if any, on how to effectively manage political risk in their capital structure decisions.
- Is geopolitical risk correlated to the capital structure of companies in the United States? - Is there a significant difference in the correlation between US companies’ capital structure and geopolitical risk based on their industry, size, profitability, or liquid assets? 1. Research objectives and scope. This study aims to analyze the correlation between geopolitical risk and the capital structure of US companies. I chose the US market because it is one of the largest and most developed economies in the world, and has a significant influence on the global economy.
For example, a presidential election or a decision by the US government can affect the country's economic policy, trade policy, and investment policy. In addition, the United States is also one of the countries with many foreign relations and strategic military alliances around the world. Political conflicts or adverse events may occur in those countries and affect the economic, commercial, and investment relations of the United States with those countries. This can also create risks for the US economy and the world as a whole.
Overview of data and research methods. Collect data on geopolitical risk indicators and financial variables of sample US companies. The sample will include companies from different sectors and scales to ensure that the results are representative of the general population of US companies. The research methods will involve a combination of descriptive and quantitative analysis.
Descriptive analysis will be used to examine trends and patterns in the data and to identify any significant differences between different groups of companies. Quantitative analysis will be used to estimate the relationship between geopolitical risk and capital structure decisions while controlling for other factors that may influence financial decisions. Contribution of research. The contribution of this research is significant.
Recent literature has mainly focused on political risks in certain industries ofa few countries and their impact on domestic corporate financial decisions. This study is among the first to investigate the relationship between international political risk and the decision to use capital structure of all the public companies in the United States. The research on the role of geopolitical risk in the financial leverage decisions of US firms makes several significant contributions to the field offinance and economics. First, the study provides empirical evidence of the impact of geopolitical risk on the capital structure decisions of firms in different economic sectors in the US.
This knowledge is particularly relevant given the increasing geopolitical tensions and uncertainties in today's global economy. Second, the study reveals that the effects of geopolitical risk on financial leverage decisions vary across different sectors. Companies in the manufacturing and real estate industries, for example, are found to decrease their financial leverage as geopolitical risk increases. In contrast, companies in the utilities industry tend to experience a positive impact on their financial leverage under the same conditions.
These findings suggest that different sectors may respond differently to geopolitical risks and that investors and policymakers must take these sectoral differences into account. Third, the study highlights the importance of heavy leverage companies in the context of geopolitical risk.