The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms
42 Pages Posted: 14 Oct 2008 Last revised: 26 Nov 2010
Date Written: August 2008
We investigate the impact of government control and political characteristics of the privatizing government on the cost of equity of newly privatized firms. Using cost of equity estimates implied in current stock prices and analysts' earnings forecasts for a sample of 126 privatized firms from 25 countries between 1987 and 2003, we find strong, robust evidence that the cost of equity is increasing in government control, while controlling for other determinants of the cost of equity. We also find that the cost of equity is significantly related to the political system and government tenure (stability). Furthermore, we find that while the cost of equity is increasing in government control, this effect is less pronounced in countries with democratic and more stable governments. Our core findings persist after controlling for the institutional environment.
Keywords: Privatization, Control structure, Political institutions, Cost of Equity
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