Abstract

In this paper, we examine the political determinants and the economic outcomes of golden shares. Using a sample of 203 firms privatized between 1983 and 2007 in developing and industrialized countries, we find that the likelihood of observing golden shares is higher (lower) in more democratic countries (more populist governments). We find, in addition, that the probability of observing golden shares is negatively related to government stability. The legal environment is another factor affecting the likelihood of governments’ retaining golden shares. Our analysis shows that governments in common law countries are more likely to retain golden shares in privatized firms. We also investigate the economic consequences of golden shares. We find strong, robust evidence that golden shares are associated with a higher cost of equity, consistent with the political interference hypothesis. Privatized firms with golden shares have a cost of equity 25 basis points higher than privatized firms without golden shares.

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