The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms

42 Pages Posted: 14 Oct 2008 Last revised: 26 Nov 2010

See all articles by Hamdi Ben Nasr

Hamdi Ben Nasr

HEC Montreal

Narjess Boubakri

American University of Sharjah - School of Business and Management; HEC Montreal - Department of Finance

Jean-Claude Cosset

HEC Montreal

Multiple version iconThere are 3 versions of this paper

Date Written: August 2008

Abstract

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

Suggested Citation

Ben Nasr, Hamdi and Boubakri, Narjess and Cosset, Jean-Claude, The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms (August 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI. Available at SSRN: https://ssrn.com/abstract=1282194 or http://dx.doi.org/10.2139/ssrn.1282194

Hamdi Ben Nasr

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

Narjess Boubakri

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

HOME PAGE: http://www.aus.edu

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Jean-Claude Cosset (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6872 (Phone)
514-340-6987 (Fax)

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