The Politics of Stock Market Development

Review of International Political Economy 17, 2 (2010)

42 Pages Posted: 12 Jun 2008 Last revised: 9 Jan 2013

See all articles by Pablo M. Pinto

Pablo M. Pinto

University of Houston

Stephen J. Weymouth

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Peter Gourevitch

Graduate School of International Relations and Pacific Studies ; University of California, San Diego (UCSD)

Date Written: May 22, 2009

Abstract

This paper investigates empirically the political determinants of stock market development. We argue that those determinants are grounded in distributional cleavages among voters and interest groups. Our argument reverses the sign of the prevailing explanation about the role of partisanship in the literature, where it is usually assumed that left governments frighten investors. To the extent that financial development is translated into higher levels of investment that increases labor demand, workers and the parties representing them will adopt policies and regulations that favor the capitalization of financial markets. We explore the empirical content of our hypothesis against several competing explanations: the legal origins school, which argues common law proxies stronger investor protections than civil law; the electoral law school, which argues proportional representation provides weaker protections than do majoritarian ones; the institutional economics view, which argues that checks on policymaking discretion such as veto gates protect the property rights of investors and encourage investment. We test the implications of the different arguments on the level of stock market capitalization in a panel of 83 countries over the period 1975-2004. We find preliminary evidence in favor of the partisanship hypothesis: contrary to received wisdom, our results suggest that left-leaning governments are more likely to be associated with higher stock market capitalization than their counterparts to the right and center of the political spectrum. The association between the left and market capitalization is stronger in the 1990s. These results are consistent with recent theories emphasizing an emerging coalition of workers and owners against managers in favor of greater transparency and shareholder protection.

Keywords: politics, finance, economic development, regulation, political economy

Suggested Citation

Pinto, Pablo M. and Weymouth, Stephen J. and Gourevitch, Peter A. and Gourevitch, Peter A., The Politics of Stock Market Development (May 22, 2009). Review of International Political Economy 17, 2 (2010), Available at SSRN: https://ssrn.com/abstract=1144069 or http://dx.doi.org/10.2139/ssrn.1144069

Pablo M. Pinto

University of Houston ( email )

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HOME PAGE: http://pablopinto.com

Stephen J. Weymouth

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy ( email )

Washington, DC 20057
United States

HOME PAGE: http://faculty.msb.edu/sw439/

Peter A. Gourevitch (Contact Author)

Graduate School of International Relations and Pacific Studies ( email )

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University of California, San Diego (UCSD) ( email )

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