This study examines the impact of political uncertainty on the cost of equity for firms listed on the Tunisian Stock Exchange. Focusing on the period surrounding the 2011 Tunisian revolution, it investigates whether the relationship between political risk and the cost of equity differs before and after this structural break. The cost of equity is estimated using the Capital Asset Pricing Model (CAPM), while political risk is proxied by institutional indicators, including corruption, political stability, absence of violence, and regulatory quality. Using panel data for 24 nonfinancial firms over the period 2007–2016, the analysis includes both linear and nonlinear specifications. During the full sample period, the results indicate that the institutional environment does not constitute a significant determinant of the cost of equity. However, evidence of an inverted U-shaped relationship suggests that the marginal effect of political risk diminishes beyond a certain threshold. Furthermore, when distinguishing between pre- and post-revolution periods, political risk exhibits a positive and statistically significant impact on the cost of equity. These findings offer important insights for policymakers and investors in Tunisia by highlighting the impact of institutional and political risk on the cost of equity in a transition economy.
Missaoui et al. (Tue,) studied this question.