The Political Sources of Systematic Investment Risk: Lessons from a Consensus Democracy

This study examines the relationships between democratic politics and systematic investment (or capital) risk. Low risk is crucial to any well-functioning economy, as it encourages capital investment, facilitates growth, and enhances overall economic performance. This article distinguishes preelectoral, postelectoral, and institutional factors and examines how these influence systematic investment risk using daily stock market data from Germany. The results suggest that more (less) favorable and reliable investment conditions during the incumbency of right (left)-leaning governments lead to lower (higher) investment risk. This partisan effect is stronger the more inflation increases and depends on whether government is unified or divided. Investors also anticipate the effect of government partisanship: systematic risk decreases (increases) if the electoral prospects of a right (left)-leaning government enhance. Finally, grand coalition governments as well as periods of coalition formation trigger higher investment risk. T here has been an astonishing increase in the flow of international capital. Daily transac-tions made on global stock markets in 1996 amounted to 61 billion dollars. In 2006, average turn-over was worth more than 278 billion dollars on a single day.1 Along with this rapid increase in interna-tional capital flows, countries nowadays compete for capital investment on a global scale, as economic actors can—within just a few seconds—move their money among financial markets all over the world. Against this background it does not come as a sur-prise that political scientists are increasingly inter-ested in which and how political factors influence the performance of financial markets (Bernhard an