The Real-Financial Feedback Loop: Geoeconomic Fragmentation and Firms' Performance

Monday, 18 March 2024, 00:03

The analysis of a novel firm-level revenue-weighted geopolitical risk index reveals a significant real-financial feedback loop. Firms exposed to geopolitical risk face increased default probability, reduced market valuations, and higher financing costs. The impact has intensified since 2017, reflecting rising concerns over economic fragmentation in firms’ risk assessments.
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The Real-Financial Feedback Loop: Geoeconomic Fragmentation and Firms' Performance

Understanding Geoeconomic Fragmentation

The threats of geoeconomic fragmentation have accelerated in recent years. This column introduces a novel firm-level revenue-weighted geopolitical risk index by integrating corporate revenue distribution with geopolitical risk across countries.

Real-Financial Feedback Loop

  • Firms with greater exposure to geopolitical risk experience increased probability of default
  • Reduced market valuations are observed
  • Higher financing costs are incurred

Intensified Impact since 2017

  1. The feedback loop has intensified since 2017
  2. Rising apprehension regarding economic fragmentation in firms’ risk assessments

This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.

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