Abstract

A significant number of companies have relocated their facilities outside Quebec in response to the political uncertainty in the Province. This political instability, which emanates from the separation demand supported by the French separatist party (Parti Quebecois), has a rather long history and provides a unique research opportunity to assess the magnitude and direction of political risk on asset valuation. This paper explores the effects of the announcements of business relocation decisions by examining stock market's reaction to such announcements. In particular, we study the difference in the market's response to the relocations from Quebec (Montreal) and from the rest of Canada. Further, we shed light on the effects of the information conveyed by the relocation announcements on stock prices. Previous research has reported some evidence from the U.S. on the effects of the announcements of relocations. Benefiting from the event study methodology, we find statistically significant and positive reaction to such announcements. More importantly, we find statistically significantly different abnormal returns in favor of Quebec (Montreal) relocations. That is, firms relocating from Quebec (Montreal) experience statistically significantly higher stock prices relative to these which relocate from other provinces. We attribute this difference to the existence of political risk in Quebec. The results concerning the effects of the information content of such announcements are generally consistent with the existing studies