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Privatization, Political Risk and Stock Market Development in Emerging Economies

  • Enrico C. Perotti
  • Pieter van Oijen

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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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp243.pdf
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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. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 75-107, January.
  2. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
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  9. Sebastian Edwards, 1992. "Capital Flows, Foreign Direct Investment, and Debt-Equity Swaps in Developing Countries," NBER Working Papers 3497, National Bureau of Economic Research, Inc.
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  12. Schmidt, Klaus M., 2000. "The political economy of mass privatization and the risk of expropriation," European Economic Review, Elsevier, vol. 44(2), pages 393-421, February.
  13. Perotti, Enrico C, 1995. "Credible Privatization," American Economic Review, American Economic Association, vol. 85(4), pages 847-59, September.
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  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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  17. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-65, September.
  18. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
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