Economic Policy Uncertainty and Cost of Capital: The Mediating Effects of Foreign Equity Portfolio Flow

Kwabi, Frank, Owusu-Manu, Samuel, Boateng, Agyenim, Ezeani, Ernest ORCID: https://orcid.org/0000-0003-0401-9000 and Du, Anna (2022) Economic Policy Uncertainty and Cost of Capital: The Mediating Effects of Foreign Equity Portfolio Flow. Review of Quantitative Finance and Accounting, 59 (2). pp. 457-481. ISSN 0924-865X

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Abstract

We investigate whether economic policy uncertainty and the interaction of foreign equity portfolio flow and economic policy uncertainty impact the cost of capital. Using panel data of 20 countries from 2001 to 2018, we find economic policy uncertainty to exert a positive effect on the cost of capital. However, the interaction between foreign equity portfolio flow and economic policy uncertainty has a negative effect on the cost of capital, demonstrating that, the combined effect of foreign equity portfolio flow and economic policy uncertainty has the opposite effect (i.e., reduces the cost of capital). Our results are robust to alternative specifications and endogeneity.