The effect of democracy on the mutual fund recovery, Evidence from emerging countries

Abstract

This research examines how democracy affects mutual fund performance and recovery in emerging countries: Brazil, Chile, China, India, Mexico, South Africa, and Thailand. Data from 2010 to 2021 is analyzed, focusing on domestic equity mutual funds. Democracy levels are measured using the V-Dem dataset. Performance is evaluated using risk-adjusted returns, while recovery duration measures how long it takes for funds to return to pre-crisis levels. The findings show that in Chile, characterized as a strong democracy, demonstrates improved performance with higher levels of democracy. In contrast, Brazil, South Africa, India, and Mexico exhibit higher returns with lower levels of democracy. China, as a non-democratic country, exhibits a significantly negative impact. These negative relationships could be caused by struggles in making credible commitments, increased risk-taking, credit rating downgrades during elections, and longer decision-making processes. Meanwhile, Thailand, as a non-democratic country, exhibits a positive relationship, aligning with the initial hypothesis. The study also finds that higher democracy levels prolong the recovery period for mutual funds during crises. This research provides insights for policymakers and investors on how democracy influences mutual fund performance and recovery in emerging economies.