Friend or foe? Bilateral political relations and the portfolio allocation of foreign institutional investors

Publication date

2026-02

Authors

Lugo, StefanoORCID 0000-0003-1736-0232ISNI 0000000419143589
Montone, MaurizioISNI 0000000419579286

Editors

Advisors

Supervisors

Document Type

Article
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License

cc_by

Abstract

We study the role of bilateral political relations in explaining variations in the equity portfolio allocation of foreign institutional investors. Using a large sample at the fund–firm–year level, we find that political distance between countries leads to significant retrenchment of foreign institutional investors from local firms. Consistent with our theorized mechanisms, we find that the effect is stronger for stocks that are more exposed to geopolitical risk, dividend-paying, and less liquid, as foreign investors sell off local securities perceived to become riskier to hold. Overall, our findings identify a novel financial channel through which geopolitical risk affects international equity markets.

Keywords

Bilateral relations, Institutional investors, Political risk, Portfolio allocation, Business and International Management, Finance, Economics and Econometrics, Strategy and Management

Citation

Lugo, S & Montone, M 2026, 'Friend or foe? Bilateral political relations and the portfolio allocation of foreign institutional investors', Journal of Corporate Finance, vol. 97, 102937. https://doi.org/10.1016/j.jcorpfin.2025.102937