Effect of the Political Regime on Asset Returns in Emerging Markets : An Empirical Investigation

The paper explores the role of the political regime on asset returns in an International Capital Asset Pricing Model (CAPM) framework based on a sample of 17 emerging countries. The results reveal that the political regime has substantial impact on average stock returns. Firms in autocratic regimes have higher average returns that exceed the required returns. This is consistent with the fact that autocratic institutions have compensations for greater chances of bankruptcy, political instability and nationalization of assets. Results are robust to an alternative model to the standard CAPM risk model as well as to an unbalanced sample of countries