The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms
57 Pages Posted: 31 Mar 2010
Date Written: February 26, 2010
We use a unique dataset of 158 privatized firms from 29 countries between 1987 and 2003 to investigate the political determinants of the cost of equity. 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 to the government’s tenure. In addition, we find that the adverse effects of government control on the cost of equity are less pronounced when the government has been in power longer and when the risk of government expropriation is lower.
Keywords: Cost of Equity, Control structure, Political institutions, Privatization
JEL Classification: G32, G31, G38, G30
Suggested Citation: Suggested Citation