Working Paper: CEPR ID: DP2243
Authors: Enrico C. Perotti; Pieter van Oijen
Abstract: This Paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test, which gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is correlated with improvements in perceived political risk and that these improvements are significantly larger in privatizing countries than in non-privatizing countries, indicating that the resolution of such risk is endogenous to the privatization process. Our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies, suggesting that political risk is a priced factor. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.
Keywords: privatization; political risk; emerging markets; financial development; equity issue
JEL Codes: F30; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sustained privatization programs in emerging economies (L33) | significant reduction in perceived political risk (F69) |
| changes in political risk (F69) | local stock market development (G10) |
| sustained privatization programs in emerging economies (L33) | local stock market development (G10) |
| political risk resolution (F34) | rapid growth of stock markets in emerging economies (O54) |