Research / BFI Working PaperFeb 21, 2022

Does Political Partisanship Cross Borders? Evidence from International Capital Flows

Elisabeth Kempf, Mancy Luo, Larissa Schäfer, Margarita Tsoutsoura

Does partisan perception shape the flow of international capital? 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. Our empirical strategy ensures direct economic effects of foreign elections or government ties between countries are not driving the result. Ideological alignment with foreign countries may also affect capital allocation of non-U.S. investors and can explain patterns in bilateral investment. Combined, our findings imply partisan perception is a global phenomenon and its economic effects transcend national borders.