Political tension causing diplomatic strains rarely escalates into direct violence or war. This paper identifies the economic effects of such non-violent political tension by examining Taiwan’s sovereignty debate. Non-violent events harming the relationship with mainland China lead to an average daily drop of 200 basis points in Taiwanese stock returns. The impact is more severe on firms openly supporting the Taiwanese pro-independence party. Through a series of tests we identify this economic penalty as initiated by mainland authorities, who specifically target political opponents that are economically exposed to mainland China via either investments or exports.
political tension; political connections; China; Taiwan;
- F51: International Conflicts • Negotiations • Sanctions
- G14: Information and Market Efficiency • Event Studies • Insider Trading
- G15: International Financial Markets
TSE Working Paper, n. 14-484, April 2014, revised July 2015