IDEAS home Printed from https://ideas.repec.org/a/sae/ijcgvn/v12y2019i2p187-212.html
   My bibliography  Save this article

Country-level Governance and Capital Markets in Asia-Pacific Region

Author

Listed:
  • Geeta Duppati
  • Frank Scrimgeour
  • Anoop S. Kumar

Abstract

Manuscript type: An empirical analysis of the relationship between country-level governance and share markets in the Asia-Pacific region was carried out using dynamic value at risk (Dynamic VaR), mixed data sample (MIDAS) and exponential generalised autoregressive conditional heteroskedasticity (EGARCH) models. Research question/issue: Is there a relationship between a country’s governance and stock market in terms of the level of returns and share price volatility? We hypothesise that stock returns for countries with higher levels of governance will have lower ex ante expected returns and less volatility than countries with lower levels of governance. Research findings/insights: It is evident from the empirical findings that there is still significant diversity in both corporate-level governance and country-level governance within the Asia-Pacific region. The results from using mixed data sample-autoregressive distributed lag (MIDAS-ADL) model correlation between world governance index (WGI) and the dynamic VaR suggest that the estimators of high frequency slope for India, China and Malaysia are negative. In addition, their t statistics show that the correlation is significant; meanwhile, their goodness of fit is also very high confirming the explanation power of MIDAS-AD model. Consequently, the capital market performances of India, China and Malaysia are negatively related to their corporate-level governance and country-level governance. However, China has a positive correlation between WGI and corporate-level governance and country-level governance. This uncommon phenomenon may be the result of its special political system and the segregation of the capital market and the real economy. Theoretical/academic implications: The linkage between country-level governance and volatility of stocks in Asia-Pacific markets indicates there is scope to reduce stock price volatility through enhanced national governance. Volatility as an indicator of risk reflects market uncertainty in terms of processing information signals to find the equilibrium return risk nexus. Consequently, researchers have to incorporate the data of different frequency into the same equation using robust methods. Practitioner/policy implications: Regulatory frameworks encompassing stock markets will benefit from a more focussed consideration of the way in which governance and risk are correlated. Findings from the generalised autoregressive conditional heteroskedasticity (GARCH) and VaR analysis are that stock market volatility is a suitable proxy for the governance of a country. As country governance indices are annual at best, volatility measures give more timely readings. An increase in volatility suggests there is a decline in national governance, and this has implications for those involved in trade, donor organisations and international lending agencies such as the World Bank.

Suggested Citation

  • Geeta Duppati & Frank Scrimgeour & Anoop S. Kumar, 2019. "Country-level Governance and Capital Markets in Asia-Pacific Region," Indian Journal of Corporate Governance, , vol. 12(2), pages 187-212, December.
    • Handle: RePEc:sae:ijcgvn:v:12:y:2019:i:2:p:187-212
    DOI: 10.1177/0974686219886419
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0974686219886419
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0974686219886419?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Nguyen, Tuan & Locke, Stuart & Reddy, Krishna, 2015. "Ownership concentration and corporate performance from a dynamic perspective: Does national governance quality matter?," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 148-161.
    2. Berkowitz, Daniel & Pistor, Katharina & Richard, Jean-Francois, 2003. "Economic development, legality, and the transplant effect," European Economic Review, Elsevier, vol. 47(1), pages 165-195, February.
    3. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why are foreign firms listed in the U.S. worth more?," Journal of Financial Economics, Elsevier, vol. 71(2), pages 205-238, February.
    4. Reena Aggarwal & Isil Erel & René Stulz & Rohan Williamson, 2010. "Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 3131-3169, March.
    5. Doidge, Craig & Andrew Karolyi, G. & Stulz, Rene M., 2007. "Why do countries matter so much for corporate governance?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 1-39, October.
    6. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 107-156.
    7. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    8. Giannetti, Mariassunta & Koskinen, Yrjö, 2010. "Investor Protection, Equity Returns, and Financial Globalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(1), pages 135-168, February.
    9. Art Durnev & E. Han Kim, 2005. "To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation," Journal of Finance, American Finance Association, vol. 60(3), pages 1461-1493, June.
    10. Kanagaretnam, Kiridaran & Lobo, Gerald J. & Whalen, Dennis J., 2007. "Does good corporate governance reduce information asymmetry around quarterly earnings announcements?," Journal of Accounting and Public Policy, Elsevier, vol. 26(4), pages 497-522.
    11. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    12. Eng, L. L. & Mak, Y. T., 2003. "Corporate governance and voluntary disclosure," Journal of Accounting and Public Policy, Elsevier, vol. 22(4), pages 325-345.
    13. Acharya, Viral V. & Amihud, Yakov & Litov, Lubomir, 2011. "Creditor rights and corporate risk-taking," Journal of Financial Economics, Elsevier, vol. 102(1), pages 150-166, October.
    14. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
    15. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    16. Eric Ghysels & Arthur Sinko & Rossen Valkanov, 2007. "MIDAS Regressions: Further Results and New Directions," Econometric Reviews, Taylor & Francis Journals, vol. 26(1), pages 53-90.
    17. Söhnke M. Bartram & Gregory Brown & René M. Stulz, 2009. "Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms?," NBER Working Papers 14931, National Bureau of Economic Research, Inc.
    18. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    19. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    20. Hooper, Vince & Sim, Ah Boon & Uppal, Asfandyar, 2009. "Governance and stock market performance," Economic Systems, Elsevier, vol. 33(2), pages 93-116, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bruno, Valentina & Claessens, Stijn, 2010. "Corporate governance and regulation: Can there be too much of a good thing?," Journal of Financial Intermediation, Elsevier, vol. 19(4), pages 461-482, October.
    2. Aggarwal, Reena & Erel, Isil & Ferreira, Miguel & Matos, Pedro, 2011. "Does governance travel around the world? Evidence from institutional investors," Journal of Financial Economics, Elsevier, vol. 100(1), pages 154-181, April.
    3. Enikolopov, Ruben & Petrova, Maria & Stepanov, Sergey, 2014. "Firm value in crisis: Effects of firm-level transparency and country-level institutions," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 72-84.
    4. Kim, Hugh & Liao, Rose C. & Wang, Yan, 2015. "Active block investors and corporate governance around the world," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 181-194.
    5. Richard Herron, 2022. "Payout policy and the interaction of firm-level and country-level governance," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 1-39, January.
    6. Abdallah, Abed Al-Nasser & Ismail, Ahmad K., 2017. "Corporate governance practices, ownership structure, and corporate performance in the GCC countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 98-115.
    7. Ge, Wenxia & Kim, Jeong-Bon & Song, Byron Y., 2012. "Internal governance, legal institutions and bank loan contracting around the world," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 413-432.
    8. Zhang, Qiyu & Zhang, Xiaoxiang & Chen, Ding & Strange, Roger, 2022. "Market discipline or rent extraction: Impacts of share trading by foreign institutional investors in different corporate governance and investor protection environments," International Review of Financial Analysis, Elsevier, vol. 79(C).
    9. González, Maximiliano & Trujillo, María Andréa & Guzmán, Alexander, 2009. "Colombian ADRs: Why so few?," Galeras. Working Papers Series 023, Universidad de Los Andes. Facultad de Administración. School of Management.
    10. Black, Bernard S. & de Carvalho, Antonio Gledson & Gorga, Érica, 2012. "What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries)," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 934-952.
    11. G. Andrew Karolyi & Dawoon Kim & Rose Liao, 2020. "The Theory and Practice of Investor Relations: A Global Perspective," Management Science, INFORMS, vol. 66(10), pages 4746-4771, October.
    12. Iliev, Peter & Roth, Lukas, 2018. "Learning from directors' foreign board experiences," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 1-19.
    13. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    14. Black, Bernard & de Carvalho, Antonio Gledson & Khanna, Vikramaditya & Kim, Woochan & Yurtoglu, Burcin, 2014. "Methods for multicountry studies of corporate governance: Evidence from the BRIKT countries," Journal of Econometrics, Elsevier, vol. 183(2), pages 230-240.
    15. Braga-Alves, Marcus V. & Morey, Matthew, 2012. "Predicting corporate governance in emerging markets," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1414-1439.
    16. Thierry Foucault & Laurent Frésard, 2012. "Cross-Listing, Investment Sensitivity to Stock Price, and the Learning Hypothesis," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3305-3350.
    17. Nguyen, Thao & Bai, Min & Hou, Yang & Vu, Manh-Chien, 2021. "Corporate governance and dynamics capital structure: evidence from Vietnam," Global Finance Journal, Elsevier, vol. 48(C).
    18. Ferreira, Miguel A. & Matos, Pedro, 2008. "The colors of investors' money: The role of institutional investors around the world," Journal of Financial Economics, Elsevier, vol. 88(3), pages 499-533, June.
    19. Thomas O'Connor, 2012. "Dividend payout, corporate governance, and the enforcement of creditor rights in emerging markets," Economics Department Working Paper Series n227-12.pdf, Department of Economics, National University of Ireland - Maynooth.
    20. Chen, Kevin C.W. & Chen, Zhihong & Wei, K.C. John, 2009. "Legal protection of investors, corporate governance, and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 273-289, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:ijcgvn:v:12:y:2019:i:2:p:187-212. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.