The same company is worth a different amount depending on the zip code of its headquarters

Take two identical companies: same revenue, same margin, same team, same product. One is headquartered in Zurich. The other, in a country where the regulatory framework changed three times in the last five years. In any serious valuation exercise, the second is worth less. Not because the business is worse. Because whoever puts up the money to buy it demands more return in exchange for accepting more legal uncertainty, and that additional return is subtracted directly from the price they are willing to pay.

That mechanism has a name in valuation practice: the country risk premium. It is added to the discount rate used to bring a company's future earnings to present value. The higher the rate, the lower the present value. And part of that premium, sometimes the largest part, does not measure whether the economy will grow or not: it measures how predictable the law is under which that company operates. A judicial system the market has doubts about, a tariff framework that changes by decree, a reform that reopens the rules of the game mid-match, all of that translates, formula and all, into a number that lowers the sale price.

When fear arrives before the law

The interesting part is that this discount does not wait for the law to change. Catalonia is the clearest example Spain has. After the October 2017 independence referendum, 3,208 companies applied to move their registered office out of the region in a single quarter, according to Spain's Registrars' Association. CaixaBank and Banco Sabadell, two of the country's largest banks, moved their registered offices to the Valencia region that same month. CaixaBank is still there; Sabadell did not approve its return to Catalonia until January 2025, more than seven years later. It was not a reaction to a law that already existed: it was a reaction to the possibility that the rules might change, and that possibility was enough to move headquarters that had been in the same place for decades.

After the October 2017 referendum, 3,208 companies applied to move their registered office out of Catalonia in a single quarter, before a single new article of law existed.

Mexico is living a different version of the same phenomenon with the judicial reform approved in 2024 and implemented in 2025 with the first popular election of judges. In June 2025, ICC Mexico counted twelve active international investment arbitrations against the country, mostly in mining, energy and the financial sector, and warned that the reform could change the rules of the game in key sectors. In December, the OECD noted that the reform, given its depth, has generated uncertainty about the functioning of the judicial system that affects domestic investors and SMEs above all. International arbitration, it is worth noting, is not a tool used when everything is going well: it is the mechanism an investor turns to when they would rather pay the cost of litigating abroad than depend on local certainty.

In June 2025, ICC Mexico counted twelve active international investment arbitrations against the country; in December, the OECD spoke of uncertainty about the judicial system. The market is already pricing the risk.

Why this is not only a problem for governments

Here is the part that matters to anyone evaluating buying, selling or expanding into a new country: this risk is almost never put on the table with a number. It is talked about as a feeling ("that country makes me a bit nervous right now") instead of treated as what it is, a variable that already has a methodology, published rates (Damodaran's country risk premiums are updated every January) and documented precedents. That means two buyers can be evaluating the same opportunity, one correctly discounting the country's legal risk and the other ignoring it, and arrive at very different valuations without either of them realizing why.

Legislation does not only change what a company can or cannot do. It changes, with a formula behind it, how much that company is worth the day someone wants to buy it, sell it or partner with it. And the effect is not always proportional to the size of the reform: sometimes it is enough for the possibility of a change to settle into the public conversation, as in Catalonia in 2017, for capital to move before a single new article of law exists.

What to do with this in practice

Before evaluating an opportunity in a new jurisdiction, it is worth treating legal and regulatory risk as one more line in the analysis, not as a footnote. Three concrete questions help turn the feeling into a number: how many active international arbitrations does this country have, and in which sectors are they concentrated? Is there a documented, not anecdotal, trend regarding the predictability of its courts or regulators over the last five years? How quickly did capital move out of the region the last time there was a sign of instability, and how long did it take (if ever) to come back?

None of those questions eliminates the risk. But they do avoid the most common mistake, which is discovering the discount after signing, when it is already too late to ask for it.