It is argued that politics plays a vital role in emerging capital markets. This thesis focuses on
three specific political aspects and examines how each of these aspects could impact the stock
return dynamics in emerging markets.
Firstly, to examine the relationship between political risk and stock returns, political risk
ratings from ICRG observed during the period of 1984 – 2007 is employed for the analysis.
This thesis finds the magnitude of political risk change to be larger in emerging markets than
in developed ones and the presence of global convergence in political risk between these two
markets portfolios after the year 1995. Moreover, the influence of political risk is found to be
greatest on the aggregated returns of Pacific Basin markets as opposed to other emerging and
developed markets. This essay thus provides important implications for international
investors that there are differences in political risk exposures among the different types of
market and investing in Pacific Basin emerging markets can increase the level of risk and
affect the risk-return characteristic of their investment portfolios.
Secondly, an investigation is made on the differences between the stock returns of ten
emerging markets under military and civilian regimes. This thesis provides evidence that
there is no significant difference in stock returns between military and civilian governments
for eight of the ten markets being examined. However, military rule is found to be a stock
price factor for two markets being those of Pakistan and Thailand. Such military returns
premiums found in these two countries do not appear to be explained by economic cycle
fluctuation, extreme stock market slumps, the error term, or returns volatility. The findings
are robust to the control of worldwide stock market movements as well as to the test of
spurious regression bias and randomisation-bootstrap. The findings provide important
information for investors that the shifts from civilian to military government in Pakistan and
Thailand do not increase the risk level of their investment portfolios. However, such findings
observed in these two countries are country-specific and cannot be applied to all countries
under military governments.
Lastly, the relationship among political connectedness, stock returns, and firm values in
Thailand is examined. From a newly hand-collected sample of Thai firms observed over the
period 1987 to 2008, this thesis finds that there are differences in the stock returns and
financial performance of firms with different levels of political connection. The findings
suggest that firms which are connected to higher level politicians are associated with higher
stock returns. This is particularly prevalent for firms in tightly regulated industries. Highly
connected firms are also associated with better financial performance and earnings prospect
than those with lower level of connection. Moreover, this thesis finds the incidence of
political connections to be higher for firms with long establishment and listed firms seek
political affiliations regardless of where their headquarters are located in Thailand. The
evidence strongly suggests that the stock market participants do incorporate factors such as
political connection into their investment decisions and the level of corporate political
connectedness is a stock price factor in Thailand.