Financial Globalization & Democracy: Political Uncertainty, Information Acquisition, and Contagion from Domestic to International Investors in Emerging Markets

. Acentralquestionininternationalandcomparativepoliticaleconomycon-cerns the constraining effect of global capital markets on emerging-market governments. Global investors vote with their feet by shiing out of a country’s assets when uncertainty is high or unfavorable policy changes are anticipated. Despite the increasing globalization of capital, however, I argue that financial market reactions to politics continue to be largely driven by the responses of local investors. Building on models of asymmetric information in capital markets, I posit that better-informed domesticinvestorsformaccurate, timelyassessmentsofdomesticpoliticalrisk, while lesswell-informed international investors observethe signalsfrom domestic investor activitytomaketheirownportfoliodecisions. Inthismodel, globalmarketresponses to political events in oen distant and opaque countries are characterized by contagion dynamics from domestic to foreign investors. I test this contagion model with data on closed-end country funds from -, which afford a unique opportunity to measure the differential reactions of international and domestic investors to emerging-market elections. Using a fractional error correction approach, I estimate short-and long-run dependencies between domestic and international investor behavior and find strong evidence of contagion from the former to the latter, confirming that global financial markets transmit political information from locals to foreigners.