Abstract
How do politicians make credible commitments to protect property rights? The current political science literature emphasizes external commitments and independent regulatory agencies. This paper proposes an alternative: the diversification of policy risk through capital markets. It argues that state-owned firms and the policy-makers who control them may issue shares and commit to protect investor rights as a hedge against the risk of intervention by future governments. The paper develops a political theory of controlling shareholder attitudes towards stricter corporate governance standards and illustrates it using evidence from a 2001 Brazilian experiment in stock market regulation.
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