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Privatization, Political Risk and Stock Market Development in Emerging Economies

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  • 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 is correlated with improvements in perceived political risk. These gains tend to be gradual over the privatization period and are significantly larger in privatizing countries than in nonprivatizing countries, suggesting that the resolution of such risk is endogenous to the privatization process. Our analysis shows further 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.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 243.

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Length: pages
Date of creation: 01 Mar 1999
Date of revision:
Handle: RePEc:wdi:papers:1999-243

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  1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
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  12. Klaus M. Schmidt, 1998. "The Political Economy of Mass Privatization and the Risk of Expropriation," William Davidson Institute Working Papers Series 136, William Davidson Institute at the University of Michigan.
  13. Mark Grinblatt & Chuan Yang Hwang, . "Signalling and the Pricing of Unseasoned New Issues," Rodney L. White Center for Financial Research Working Papers 1-89, Wharton School Rodney L. White Center for Financial Research.
  14. Perotti, Enrico C, 1995. "Credible Privatization," American Economic Review, American Economic Association, vol. 85(4), pages 847-59, September.
  15. Narjess Boubakri & Jean-Claude Cosset, 1998. "The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries," Journal of Finance, American Finance Association, vol. 53(3), pages 1081-1110, 06.
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