Essays on geopolitical and systemic risks

Increasing tensions and conflicts among countries in recent years have led to a rise in geopolitical risk (GPR). Opinions and anecdotes suggest that the rising GPR may raise organizational uncertainty, which may curb firm-level financial outcomes. The first essay of this thesis empirically tests the impact of GPR on firm-level innovation outcomes. It reports that an increase in GPR stifles innovation output, measured by the volume and value (financial and scientific) of patents. We propose three mechanisms for this GPR-innovation relation. First, the negative GPR effect strengthens as the firm’s exposure to foreign product markets increases. Second, in response to rising GPR, the firm lowers its research and development investment, which in turn curbs its innovation output. Third, following a rise in GPR, fewer inventors join a firm than the number that leave it.
In the second essay of this thesis we find that geopolitical risk (GPR) negatively affects mergers and acquisitions (M&A) decisions of US public firms. We find that rising US?specific GPR reduces the probability of firms participating in M&A deals. We also find that foreign market exposure weakens the negative impact of GPR on probability of cross-border M&A deals. This is because firms with high foreign market exposure use the foreign connection to acquire foreign firms and diversify the risk. When GPR rises, the liquidity of stocks and cash holding in firms decline, making it difficult for firms to finance for M&A.
The final essay documents and analyses the spillover of stock volatility in the supply chain network. Past studies have shown that spillover exists in the financial networks comprising of banks and financial institutions. But our study provides evidence that such spillover exists in real economic networks such as supply chain. Using the forecast error variance decomposition (FEVD) method, we establish that volatility spillover is present in between 300 selected firms of the supply chain. Primarily we find that customers create more volatility spillover than suppliers. We also find that volatility shocks are transmitted more towards competitors than supply chain partners. The high spillover created by customers dampen the volatility of their network peers. In this essay we show that customers are more dominant in the supply chain and this real market dominance is reciprocated in the financial market through their high volatility spillover.