The performance of privatization stocks in emerging markets : the role of political risk

This paper investigates the argument that privatization share pricing reflects a heightened political risk sensitivity, following Perotti (1995). We do by examining the relative performance in the short and medium term of privatization stocks in emerging markets. Our goal is to determine whether country risk changes have a stronger effect on the return of privatized firms than on the market as a whole. We are also interested in determining whether evidence can be found for "confidence building". We provide evidence that these stocks exhibit a greater exposure to changes in perceived political risk, particularly for larger corrections. This sensitivity progressively disappear after the sale, suggesting that uncertainty over government policy affecting the privatized firm tend to be resolved over time. This evidence suggests that the recent superior post-IPO performance of privatized stocks reported in Megginson et al (1996) reflects a period of progressive resolution of policy risk in emerging markets.