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

Authors

  • HAMDI BEN-NASR,

    1. College of Business Administration, King Saud University
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  • NARJESS BOUBAKRI,

    1. School of Business and Management, American University of Sharjah, UAE
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  • JEAN-CLAUDE COSSET

    1. HEC Montreal, Quebec, Canada. We thank Ayca Altintig, Jean Bédard, Merle Erickson (the editor), Jean-Marie Gagnon, Omrane Guedhami, Michael Lemmon, Nadia Massoud, Dev Mishra, Oumar Sy, and especially an anonymous reviewer, for insightful comments and suggestions on previous versions of this paper. We also received valuable comments from participants at the special session on privatization at the 2008 Financial Management Association European Conference, the 2008 Paris International Finance Meeting, the 2009 Academy of International Business Meeting, and the 2009 Financial Management Association Annual Meeting. We appreciate the financial support of the Social Sciences and Humanities Research Council of Canada and le Fonds Québécois de la Recherche sur la Société et la Culture and excellent research assistance from Ali Boudhina and Anas Gatbach. Hamdi Ben-Nasr acknowledges financial support from the deanship for research at King Saud University, KSA.
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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.

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