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

Journal of Accounting Research, Forthcoming

54 Pages Posted: 3 Nov 2011

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: November 1, 2011

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.

Keywords: Cost of Equity, Government Ownership, Political institutions, Privatization

JEL Classification: G32, G31, G38, G30

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 (November 1, 2011). Journal of Accounting Research, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1952666

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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