Stock Market Returns, Return Volatility, and Interest Groups*

This paper provides preliminary evidence that interest groups reduce both the level and the volatility of returns on a national stock market. These findings are robust to model specifications that include traditional growth regression “policy” variables as well as political, economic, and financial institutions variables. The estimated magnitude of the relationship between interest group activity and stock market performance is quite striking. In particular, a one percent increase in the number of interest groups in a country is associated with a direct reduction in average annual stock market returns of roughly 2-5%, and a reduction in the volatility of annual stock returns of roughly 6-13%. JEL classification: C21; D72; G15; O16