Privatization, Political Risk and Stock Market Development

Enrico Perotti and Pieter van Oijen

No 2243, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Emerging Markets; Equity Issue; Financial Development; Political Risk; Privatization (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 1999-09
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Citations: View citations in EconPapers (11)

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