Political and Economic Freedoms and Global Equity Valuations

The global dispersion of equity valuations has witnessed a marked increase in recent years. We compare the roles of political freedom and economic freedom in these valuation patterns. Using cyclically adjusted price to earnings (CAPE) data from twenty-three countries over 2006–2023, we show the variability in valuation is better explained by political freedom than by economic freedom indicators. More democratic countries with high growth rates enjoy higher CAPEs. On its own, the degree of democratization explains about 13% of global CAPE variation, whereas the levels of economic freedom and property rights explain less than 1%.