International evidence on the link between quality of governance and stock market performance

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8 Citations (Scopus)

Abstract

This paper examines the link between country-level governance and global stock market returns. We find a negative relation between governance quality and equity return. Countries with low governance scores, on average, have higher equity returns than those with high governance scores after controlling for global risk factors known to influence international equityreturns. This implies that investors associate low governance quality with increased risk and thus demand higher risk premium. We find that the quality of governance as measured by Political Stability and Absence of Violence is key governance dimension affecting international equity returns, suggesting that heightened investor concerns over political risks have profound impact on equity markets. Interestingly, we find no evidence that variation in equity returns is affected by the governance indicator representing Voice and Accountability. The findings of this study provide important policy implications.

Original languageEnglish
Pages (from-to)361-384
Number of pages24
JournalGlobal Economic Review
Volume40
Issue number3
DOIs
Publication statusPublished - Sep 2011

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stock market
governance
equity
performance
evidence
investor
political stability
Governance
Stock market performance
premium
violence
responsibility
Equity returns
demand
market

Keywords

  • Country-level governance
  • Global risk factors
  • Political stability
  • Stock market performance

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business and International Management
  • Political Science and International Relations

Cite this

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AB - This paper examines the link between country-level governance and global stock market returns. We find a negative relation between governance quality and equity return. Countries with low governance scores, on average, have higher equity returns than those with high governance scores after controlling for global risk factors known to influence international equityreturns. This implies that investors associate low governance quality with increased risk and thus demand higher risk premium. We find that the quality of governance as measured by Political Stability and Absence of Violence is key governance dimension affecting international equity returns, suggesting that heightened investor concerns over political risks have profound impact on equity markets. Interestingly, we find no evidence that variation in equity returns is affected by the governance indicator representing Voice and Accountability. The findings of this study provide important policy implications.

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