Privatization, political risk and stock market development in emerging economies

This paper investigates whether privatization in emerging economies has a s ignificant indirect effect on local stock market development through the re solution of political risk. We argue that a sustained privatization program represents a major political test that 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 i n privatization is indeed correlated with improvements in perceived politic al risk. Our analysis further shows that changes in political risk in gener al tend to have a strong effect on local stock market development and exces s returns in emerging economies. We conclude that the resolution of politic al risk resulting from successful privatization has been an important sourc e for the rapid growth of stock markets in emerging economies. (C) 2001 Els evier Science Ltd. All rights reserved. JEL classification: G18; F30.