China’s anti-corruption campaign and stock returns of luxury goods firms

This paper uses the unexpected launch of the Chinese anti-corruption campaign in 2012 to study the stock market effects of political risk. Political risk is distinct from systematic sources of risk and hence reflected in risk-adjusted stock returns. This case study focuses on the performance of stocks of global luxury goods firms because the anti-corruption campaign primarily affected the business prospects of those firms. Against this background, this paper shows that risk-adjusted returns on stock portfolios consisting of luxury goods firms with high exposure to China shifted persistently downwards after important events associated with the anti-corruption campaign. These risk-adjusted stock returns also co-vary with a proxy of the campaign’s intensity, i.e., the number of senior officials under corruption investigation. Those findings pertain neither to luxury goods firms with low exposure to China nor to firms from other industries with high exposure to China. © 2021, Swiss Society for Financial Market Research.