This study assesses the impact of geopolitical risks on firms' financial performance. We introduce a novel measure of corporate exposure to these risks by combining information on the geographic distribution of their revenues with an assessment of the political risks of each country where revenues are earned. The estimates are carried out on non-financial firms included in the S&P 500 and Eurostoxx 600 market indices for the period 2010-22.
Firms that are more exposed to geopolitically risky markets have a higher probability of default, lower stock prices, and higher financing costs. The magnitude of these effects has been growing since 2017, when tensions between China and the United States started to build up, increasing the risks of geopolitical fragmentation.
