The Effect of Political Uncertainty on Financial Flexibility and Firm Value

Constructing a simple general equilibrium model, I examine the effect of local and international political uncertainty on financial flexibility and firm value. The model predicts that political uncertainty will have a negative effect on both. I then empirically examine the effects of political uncertainty on firms in the BRICs countries. I find that local political uncertainty has negative effects on financial flexibility, but not on firm value, while international political uncertainty has negative and larger effects on both. Part of the reason for this is that financial flexibility and long-term debt acts as a partial hedge to political uncertainty.