Investigating the Relationship Between Political Uncertainty Caused by Presidential Elections and Cost of Capital in Tehran Stock Exchange Companies

Extended abstract
1- Introduction
The discourse surrounding the impact of heightened uncertainty on economic activity at the macroeconomic level is not a novel discussion. Investors tend to delay their investment decisions in situations where the likelihood of obtaining a return on investment is low, opting to wait until additional information becomes accessible. The acceptance of high risk is necessary to engage in economic activities due to the low likelihood of capital return. The effect of political context on economic activities constitutes a significant determinant of economic growth, exerting multifaceted impacts on the overall economy. Political uncertainty can be conceptualized as the state of unpredictability surrounding governmental plans, policies, and economic programs. In this situation, economic stakeholders perceive a lack of discernible prospects, which may result in a cessation of investment or the withdrawal of investors from the market. Political uncertainty indicators can be categorized into two distinct groups: informal political uncertainty, which encompasses factors like terrorism, guerrilla warfare, and strikes, and official political uncertainty, which includes events such as legal elections and changes in the composition of cabinets.
The dismissal of cabinet members or factions in Iran does not serve as an appropriate indicator for assessing political uncertainty. Furthermore, they assert that indicators such as urban riots, revolutions, and military coups are also inadequate for evaluating the level of uncertainty in Iran. According to Article 113 of the Constitution, the President assumes the foremost position of authority within the nation, second only to the leadership role, and bears the responsibility of ensuring the effective enforcement of the Constitution. The possible effects of changes after the presidential election may affect the behavior of investors by changing investment risk. Both individual and institutional investors, such as banks, allocate their financial resources to companies through the purchase of shares or the provision of loans and facilities, with the expectation of receiving interest in return. The anticipated financial interest of these investors is regarded as the company's cost of capital. The objective of this study is to examine the potential impact of governmental transitions and presidential elections, as the primary executive power in a nation, on the cost of capital for companies.
2- Method
The statistical population under investigation encompasses all companies that were granted admission to the Tehran Stock Exchange between 2005 and 2020. Presidential elections were conducted in 2005, 2009, 2013, and 2017 in Iran, which are widely acknowledged as periods characterized by political uncertainty. The data of the chosen companies were gathered by consulting the financial statements, explanatory notes, weekly and monthly reports from the stock exchange, and the official website of the Tehran Stock Exchange.
The dependent variable in this study pertains to the cost of company capital, which is assessed by segregating it into two distinct components: the cost of equity capital and the cost of debt capital. The research focuses on the dependent variable of political uncertainty. A dummy variable was employed, with a value of one assigned to presidential election years and a value of zero assigned to non-election years. The control variables of this research study include sales growth, financial
 
leverage, company size, return on assets, company life, and the ratio of market value to the book value of assets.
3- Findings
The results of the Im-Pesaran-Shin (IPS) test demonstrated the reliability of the variables, while the F statistic provided evidence for the presence of panel data. Additionally, the Hausman test was employed to ascertain whether a fixed or random effects model was appropriate. The initial hypothesis test, conducted using the fixed effects model and employing the generalized least squares method, yielded results indicating that the variable of political uncertainty possesses a significance level below 0.05. the findings suggested that political uncertainty exerts a statistically significant impact on the cost associated with providing capital through equity. Moreover, during the years in which presidential elections are conducted, there is an observed escalation in the cost of equity capital. The results of the second hypothesis model test, employing the random effects model and the generalized least squares method, indicated that the p-value associated with the political uncertainty variable exceeds 0.05. This suggests that the observed political uncertainty resulting from the presidential election does not exhibit a statistically significant association with the cost of debt financing.
4- Discussion and Conclusion
The influence of political context on economic activities is a significant determinant of macroeconomic instability and investment risk. As risk levels rise, it is anticipated that investors will experience a corresponding increase in expected returns. Consequently, companies will also face an escalation in their cost of capital. The findings of the study indicate that during periods characterized by political instability, there was a notable increase in the cost of financing companies through equity. However, no significant difference was observed in the cost of debt capital. The rise in the expense of equity capital leads to an elevation in the mean cost of capital for the company, thereby suggesting a positive and substantial correlation between political instability and the cost of capital for the company. During presidential election years, there is a notable rise in equity capital, resulting in a higher imposition of capital costs on companies compared to non-election years. This increase in the average cost of capital adversely impacts the performance of the company. However, the cost of financing through debt remains consistent across both election and non-election years. The augmentation of capital through equity should be conducted during non-presidential election years, while the acquisition of fresh financial resources during election years should be facilitated through borrowing. When generalizing the findings of this study, it is important to take into account the impact of the relatively high annual inflation observed during the research period, as well as the consequences of international sanctions and the subsequent two-year phase of their removal.