International relations as a driver of equity investments: Evidence from shareholders’ reaction to geopolitical shocks

This paper explores how international relations influence equity investments, focusing on shareholder reactions to six major geopolitical shocks between 2020 and 2023: namely, the Covid-19 outbreak, the UK-EU Brexit Trade Agreement, the US withdrawal from Afghanistan, the Russian full-scale invasion of Ukraine, the Taiwan Strait crisis, and the Hamas-led attack on Israel. The study examines the changes in investors’ portfolio exposures (PE) in response to these shocks, by adopting the shareholder-level perspective and considering factors such as geopolitical alliances, voting alignment at the United Nations General Assembly, and cross-country differences in the Index of Economic Freedom and the Human Development Index. The results show that bloc-level relations play a significant role in driving PE changes, with foreign investors generally reducing their exposure during shocks. The findings underscore the importance of geopolitical factors in investment decisions, revealing how the perceived strength of alliances and differences in institutional quality can shape investor behaviour.