POLICY RISK, LEVEL OF MARKET DEVELOPMENT, AND LONG RUN RETURNS ON PRIVATIZED INITIAL PUBLIC OFFERINGS

Abstract

Policy risk can explain the long run returns on privatized initial public offerings (PIPO), but not on private initial public offerings (IPO). This relation is more robust and sensitive for emerging economies stocks compared to developed economies stocks. At the same time, emerging economies stocks underperform developed economies stocks. Thus there are confounding effects, which are not accounted from previous studies, from policy risk and level of market development on long run returns on PIPO. However, only policy risk, and not level market development, can explain the difference between the long run performance of PIPO and IPO, implying that level of market development affects PIPO and IPO equally. I also find evidence that bureaucratic quality is an intuitive and robust measure for policy risk.