International Evidence on the Link between Quality of Governance and Stock Market Performance

Low, Soo Wah; Kew, Si Roei; Tee, Lain Tze

doi:10.1080/1226508x.2011.601646

Cited by 35 publications

(47 citation statements)

References 31 publications

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“…On the other are theoretical arguments backed by their own set of empirical findings which suggest that improvements in country governance are associated with increasing ERP. For example, Low et al (2011) find empirical support for higher ERPs in countries with lower governance quality while Aggarwal and Goodell (2011) find the opposite relationship.…”

Section: Country-level Governance and Erp Variationmentioning

confidence: 99%

Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty

Donadelli

Persha

2014

Research in International Business and Finance

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a b s t r a c tThe average equity risk premium (ERP) in emerging markets is well-known to be significantly higher than in developed markets. But, key reasons for this remain unclear, contributing to investment strategy uncertainty. Here, we use industry-level data for 19 emerging market countries across three regions of the world to first examine the contribution of each industrial stock market to the extra premium paid by emerging markets to international investors from 1995 to present, and then to explore the relative importance of country-level governance and macroeconomic policy uncertainty in explaining both national and regional industry-by-industry ERP behavior. We conduct separate analyses for the emerging market crises period of 1995-2002, and the post-crises period of 2003-2012. Based on both static and dynamic approaches, we find that some industries indeed perform consistently better than others. In particular: (i) the healthcare and basic materials industries mostly contributed to the extra premium paid by the Asian stock market; and (ii) the East European and Latin American stock markets' extra performances were largely driven by the utilities and consumer services industries, respectively. However, our crosssectional analyses suggest that country-level governance indicators are not strongly correlated with either national or industry-level returns, with the exception of the consumer goods industry. Lastly, using both rolling-window and DCC-GARCH frameworks, we find that correlations between industrial stock market excess returns and a measure of global economic policy uncertainty are consistently negative, and follow similar patterns. Our empirical evidence as a whole suggests that industrial stock markets are more highly related both within and across countries and regions than has been suggested previously. Contrary to much existing empirical work, our results therefore suggest there is currently little space in emerging markets to exploit cross-industry portfolio diversification benefits.

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Section: Country-level Governance and Erp Variationmentioning

confidence: 99%

Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty

Donadelli

Persha

2014

Research in International Business and Finance

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“…Immature opening of capital account when the country does not support basic condition for openness make a country more vulnerable to sudden termination of capital flows. Thus, countries must have good governance system in order to remain relevant in a globally competitive financial market (Low, 2011).…”

Section: Conflicting Resultsmentioning

confidence: 99%

“…* indicates statistical significance at the 10% level, ** indicates statistical significance at 5% level and *** indicates statistical significance at 1% level. action (Low, 2011). Based on our results, the responsibility of people in power is a positive sign for foreigners to invest in domestic stock market.…”

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confidence: 75%

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Exploring the nexus between financial openness and informational efficiency – does the quality of institution matter?

Naghavi

Lau

2014

Applied Economics

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This article examines the empirical link between financial openness and informational efficiency of stock markets in 27 emerging markets. Improving on earlier papers, this study has used World Bank's Worldwide Governance Indicators (WGI) as the proxy of institutional development in dynamic panel data models estimated by generalized method of moments (GMM). Our results show, first, financial liberalization by itself has no impact on enhancing efficiency of stock market. Second, for countries with high level of institutional development, the interaction of trade openness and financial openness become significant. Third, for the same group of countries, interaction effect of financial liberalization and institutional development leads to more efficiency in stock market. Hence, our finding demonstrates the utmost importance of institutional development and its role on liberalization. Our results conclude that institutional development and trade openness are pre-requisites for a country to benefit from financial openness. Our study further provides empirical evidence to theoretical model proposed by Basu and Morey (2005) that governance is the missing link between stock market efficiency and financial liberalization. Our findings suggest that policy makers in developing economies should enhance the quality of their institution in order to optimize the benefits of financial liberalization.

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“…These effects of policy uncertainty on financial markets, driven by underlying political volatility, can be magnified in countries where there is less experience with capital markets (Białkowski et al 2008). In any case, as Low et al (2011) show, political stability more broadly defined is an unmitigated positive for stock markets, as it removes investor concerns about policy uncertainty and lowers risk premia. On balance, markets do not like to be surprised, whether in the context of a single news briefing or in drastic changes in political institutions.…”

Section: Literature Reviewmentioning

confidence: 98%

The effect of political volatility on capital markets in EU accession and neighborhood countries

Hartwell

2017

Journal of Economic Policy Reform

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Political instability has the potential to disrupt financial markets. But how do political institutions affect financial movements in an environment where all institutions are in flux? This paper looks at the effects of formal and informal political volatility in the new EU countries of Central and Eastern Europe, in the Eastern Neighborhood, and farther afield in Central Asia to answer this question. Using asymmetric GARCH modeling on monthly data, I find that informal political volatility has a significant negative effect on stock returns, while formal political institutions generate much higher financial volatility than changes in monetary policy.

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International Evidence on the Link between Quality of Governance and Stock Market Performance

Cited by 35 publications

References 31 publications

Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty

Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty

Exploring the nexus between financial openness and informational efficiency – does the quality of institution matter?

The effect of political volatility on capital markets in EU accession and neighborhood countries

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