Political Uncertainty and Firm Valuation : Evidence of a Discount Related to the Quebec Independence Movement

In this study, we investigate the effect of political uncertainty on the association between stock price metrics and accounting values. We compare market-to-book value associations of a sample of firms headquartered in Quebec with those of a sample of Canadian firms headquartered outside of Quebec, over the period 1988-1998. Our comparisons suggest that Quebec-based firms are discounted eleven to fifteen percent, on average, relative to other Canadian firms when valuation is based on a multiple of book value. However, we find no evidence the valuation discount extends to earnings. That the valuation of book values shows evidence of discounting, while the valuation of earnings does not, suggests that market participants require a higher rate of return from their investments in Quebec firms. It does not, however, suggest that Quebec firms are less profitable. Rather, the higher rate of return is accomplished by discounting the value of the firms' net assets. Higher rates of return are consistent with market participants having greater uncertainties regarding the future prospects of Quebec-based firms. However, we are not able to rule out the alternate explanation of our findings, that investors discount the value of Quebec firms because of legislation and economic policies that are unique to Quebec among Canadian provinces