Affiliation:
1. Department of Finance, International Business School Suzhou Xi'an Jiaotong‐Liverpool University Jiangsu China
2. Division of Accounting and Finance, Faculty of Business and Law The Open University Milton Keynes UK
Abstract
AbstractIn this article, we empirically examine the relation between democracy level 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 cannot 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 regulations shielding investors, and the resultant expropriation depresses the returns realized by outsiders.