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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.

Suggested Citation

  • Enrico C. Perotti & Pieter van Oijen, 1999. "Privatization, Political Risk and Stock Market Development in Emerging Economies," William Davidson Institute Working Papers Series 243, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:1999-243
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • F30 - International Economics - - International Finance - - - General

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