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Interaction Effects of Country-Level Governance Quality and Debt on Stock Returns in Developing Nations

Author

Listed:
  • Bolaji Tunde Matemilola

    (Department of Accounting and Finance, Universiti Putra Malaysia, Malaysia.)

  • Bany-Ariffin A. N.

    (Department of Accounting and Finance, Universiti Putra Malaysia, Malaysia.)

  • Annuar Md. Nassir

    (Department of Accounting and Finance, Universiti Putra Malaysia, Malaysia.)

Abstract

This study examines the moderating effects of country-level governance quality on the relationship between debt and stock returns, using 3,891 firms from 23 developing countries covering the period from 2006 to 2014. Applying the panel generalized method of moments to control for endogeneity, the findings reveal that country-level governance quality has positive moderating effects on the relationship between book debt and stock returns. Robustness check using market debt show that country-level governance quality has positive moderating effects on the relationship between market debt and stock returns. Additional analysis controls for the financial crisis years and the results are broadly similar, except that the coefficients of some variables change. The results suggest that strong governance quality lowers financial risk which encourage firms to raise debt capital needed to maximize stockholders’ returns.

Suggested Citation

  • Bolaji Tunde Matemilola & Bany-Ariffin A. N. & Annuar Md. Nassir, 2018. "Interaction Effects of Country-Level Governance Quality and Debt on Stock Returns in Developing Nations," Capital Markets Review, Malaysian Finance Association, vol. 26(1), pages 19-35.
    • Handle: RePEc:mfa:journl:v:26:y:2018:i:1:p:19-35
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    References listed on IDEAS

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    More about this item

    Keywords

    Stock returns; debt; governance quality; M & M theory; GMM estimation; developing nations.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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