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 postIPO performance of privatized stocks reported in Megginson et al (1996) reflects a period of
progressive resolution of policy risk in emerging markets.