Independence day: Political risk and cross-sectional determinants of firm exposure after the Catalan crisis

Abstract

This article covers the relationship of one of the most uncertainty-generating events in the recent history of Spain: the Catalan secessionist crisis, and the equity market. The research analyses the differences between Catalan companies and the rest of the country and it is focused on the determinants of the variability of returns after the illegal independence referendum. Determinants such as firm country risk concentration, measured as the level of internationalization or the growth opportunities, and others like size or financial constraints. An additional event study examines the impact of the flight of companies from the region. The general approach used in this article is the event study methodology. The experiment is divided in two parts (geographical and firm level). The market model is used to describe the returns, abnormal returns are obtained in one step using dummy variables and all equations are estimated together through a seemingly unrelated regressions framework. Then cross-sectional regressions are employed to explain the abnormal returns' variance. Changes in sample, variables and volatility are also implemented. It demonstrates that larger and more internationalized firms were less exposed to this event, unlike those with higher growth opportunities and higher financial constraints. Lastly, the flight of companies served to mitigate the adverse effect. This research highlights investors' fear of drastic political changes and points out characteristics that make some securities a refuge in a unique case, as an attempt of unilateral independence