The political determinants of the cost of equity: Evidence from Privatization

Abstract

In this paper, we investigate the political determinants of the cost of equity using a unique data set of 236 firms privatized between 1987 and 2006 in 38 countries. We find robust evidence that the cost of equity is increasing in government ownership. We also show that the cost of equity is significantly related to political orientation and the extent of government expropriation. Furthermore, we report a less pronounced effect of state ownership on the cost of equity in more populist governments and in more financially developed countries, in addition to a more pronounced effect of state ownership on the cost of equity when the risk of government expropriation is higher. Results from an event study examining the replacement of left-wing governments by right-wing governments suggest a lower cost of equity in more financially developed countries and a higher cost of equity in more autocratic countries and in countries with a high risk of government expropriation. Finally, we find that chief executive turnover is associated with a higher cost of equity in more autocratic countries.