Democracy and market crashes: Evidence from a worldwide panel of countries

This paper investigates the role of democracy for predicting market crashes. A panel regression specification attempts to unravel the impact of democracy on the skewness of the American Depositary Receipts (ADR5). The analysis uses an approach that accounts for the effect of democracy on the manner financial market crashes are endogenously determined by market structures. The results provide strong supportive evidence that countries with stronger democratic regimes experience higher positive skewness in asset returns, indicating less likelihood of market crashes. (C) 2016 Elsevier Inc. All rights reserved.