Capital Meets Democracy: The Impact of Franchise Extension on Sovereign Bond Markets

Abstract

AbstractBy giving political rights to poor voters, do democratic political institutions pose a risk to concentrated wealth held in the form of financial capital? This article draws lessons from the reaction of sovereign bond markets to franchise extensions between 1800 and 1920. If franchise extension transferred political power from economic and financial elites to workers, as redistributive theories of democratization suggest, then this should have resulted in a fall in the market price (increase in the yield) of a country's bonds. Exploiting the asynchronous timing of franchise reforms across countries, we provide evidence that franchise extension contributed to large increases in the premium demanded by investors to hold sovereign debt, reflecting investor fears of default. However, bond markets became less sensitive to franchise extensions over time, a pattern potentially due to the structure of inequality and the strategic adoption of institutions which protected financial interests.