So oddly calm: democratization and stock market liquidity in interwar Spain, 1914–1936

We study the effect of democratization on stock market liquidity across Spanish political regimes between 1914 and 1936. We use press news related to mass mobilization in favor of political and redistributive reforms to build a monthly index of political uncertainty, and test its impact on different measures of stock liquidity based on daily data for the Madrid Stock Exchange. Our findings suggest that shifts in political uncertainty decreased trading and increased its price impact after the transition to democracy in 1931, but not in the socio-political mobilization that shook the monarchic regime during World War I and its aftermath. The results are robust to controls for other sources of political, economic and international uncertainty. Our evidence suggests that potential challenges to the socio-economic status quo became more credible after the regime change of 1931 and increased the perceived cost of democratization for wealthy elites. This generated a situation of radical uncertainty about future asset returns, leading to a persistent deterioration of investor participation and market liquidity. Contemporary financial chronicles support this interpretation.