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Downside Systematic Risk in Pakistani Stock Market: Role of Corporate Governance, Financial Liberalization and Investor Sentiment

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  • Hussain, Shahzad
  • Akbar, Muhammad
  • Malik, Qaisar
  • Ahmad, Tanveer
  • Abbas, Nasir

Abstract

Purpose –We examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models.Design/methodology/approach – Our evidence is based on a sample of 230 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2008-2018. Furthermore, we analyze the data through Blundell and Bond (1998) technique in full sample as well sub-samples (Big & Small Firms). Findings –We document that corporate governance mechanism reduces the downside risk, whereas, investor sentiment and financial liberalization increase the investors’ exposure toward downside risk. Particularly, the results provide some new insights that the socio-political turbulence as a moderator weakens the impact of corporate governance and strengthens the effect of investor sentiment and financial liberalization on downside risk. Consistent with prior studies, the analysis of sub-samples reveal some statistical variations in large and small-size sampled firms. Theoretically, the findings mainly support agency theory, noise trader theory and the Keynesians hypothesis.Originality/value –Stock market volatility has become a prime area of concern for investors, policy makers and regulators in emerging economies. Primarily, the existence of market volatility is attributed to weak governance, irrational behavior of market participants, liberation of financial policies and sociopolitical turbulence. Therefore, the present study provides simultaneous empirical evidence to determine whether corporate governance, investor sentiment and financial liberalization hinder or spur downside risk in an emerging economy. Furthermore, our work relates to a small number of studies that examine the role of socio-political turbulence as a moderator on the relationship of corporate governance, investor sentiment and financial liberalization with downside systematic risk.

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  • Hussain, Shahzad & Akbar, Muhammad & Malik, Qaisar & Ahmad, Tanveer & Abbas, Nasir, 2021. "Downside Systematic Risk in Pakistani Stock Market: Role of Corporate Governance, Financial Liberalization and Investor Sentiment," CAFE Working Papers 14, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.
    • Handle: RePEc:akf:cafewp:14
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