Socializing Policy Risk: Capital Markets as Political Insurance

37 Pages Posted: 18 Apr 2006

See all articles by Thomas Kenyon

Thomas Kenyon

United Nations Industrial Development Organization

Date Written: 2006

Abstract

How do politicians make credible commitments to protect property rights? The current political science literature emphasizes external commitments and independent regulatory agencies. This paper proposes an alternative: the diversification of policy risk through capital markets. It argues that state-owned firms and the policy-makers who control them may issue shares and commit to protect investor rights as a hedge against the risk of intervention by future governments. The paper develops a political theory of controlling shareholder attitudes towards stricter corporate governance standards and illustrates it using evidence from a 2001 Brazilian experiment in stock market regulation.

Keywords: policy uncertainty, corporate governance, capital markets, Brazil

Suggested Citation

Kenyon, Thomas, Socializing Policy Risk: Capital Markets as Political Insurance (2006). Available at SSRN: https://ssrn.com/abstract=896562 or http://dx.doi.org/10.2139/ssrn.896562

Thomas Kenyon (Contact Author)

United Nations Industrial Development Organization ( email )

Vienna International Centre
Vienna, DC
Austria

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