Democracy and Stock Market Returns

Lei, Xun and Wisniewski, Tomasz Piotr (2024). Democracy and Stock Market Returns. Journal of Financial Research (Early access).



This paper empirically examines the relationship between the level of democratization and stock index returns in a sample of 74 countries. Compared with democracies, autocratic states are characterized by lower returns despite exhibiting higher return volatility. Even though this higher volatility can be mostly attributed to diversifiable country-specific risk, the Capital Asset Pricing Model is unable to explain the return differential. Instead, it is the level of investor protection that can fully account for the phenomenon described here. Autocratic leaders may be reluctant to promulgate regulation shielding investors and the resultant expropriation depresses the returns realized by outsiders.

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