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New research disproves a pearl of conventional wisdom – that a move to a democratic form of government is good for investors in that country.

Indeed, much of the conventional wisdom about investing is wrong. Another example is that investors seeking high returns should invest in countries that are forecasted to have high rates of economic growth, such as India and China.

It is intuitively logical that if you could accurately forecast which countries will have high rates of economic growth, you could exploit that knowledge and earn abnormal returns. Unfortunately, relying on intuition often leads to incorrect conclusions.

In this case, the wrong conclusion is reached because it fails to account for the fact that markets are highly efficient in building information about future prospects into current prices. The historical evidence on the correlation of country economic growth rates and stock returns demonstrates this point. Researchers, including Jay Ritter (Economic Growth and Equity Returns), Jeremy Siegel (Stocks for the Long Run) and Antti Illmanen (Expected Returns) have found that there has actually been a slightly negative correlation between country growth rates and stock returns.


The conventional wisdom on democratization (based on consumption theory) is that it leads to a lowering of the ex-ante equity risk premium. That view is based on the belief that democracy increases the economic surplus of a country, and the economic pie gets larger for everyone.

Is that actually the case?

Despite the importance of the question, the literature is blank on the subject.

Max Miller, author of the January 2020 paper “Democratization, Inequality, and Risk Premia,” sought to answer the question. Miller begins by noting: “Since the industrial revolution, the world has seen three waves of democratization. These democratizations, broadly defined as extensions of political rights to groups of people previously excluded from political processes, were fraught with inter-socioeconomic class tension, causing uncertainty for the politically powerful and economically wealthy. The finance literature has mostly focused on political uncertainty within a given political system, or risk brought about by changes to the so-called ‘rules of the game.’ However, uncertainty over ‘the game’ itself has been largely ignored. Democratizations are steeped in political uncertainty and act as an ideal laboratory to study its effects. By studying asset markets, I observe how the preferences and expectations of the wealthiest members of these societies reacted to democratizations.” His sample covered 57 countries spanning 200 years.