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

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  • Soo-Wah Low
  • Si-Roei Kew
  • Lain-Tze Tee

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 equity returns. 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.

Suggested Citation

  • Soo-Wah Low & Si-Roei Kew & Lain-Tze Tee, 2011. "International Evidence on the Link between Quality of Governance and Stock Market Performance," Global Economic Review, Taylor & Francis Journals, vol. 40(3), pages 361-384, September.
  • Handle: RePEc:taf:glecrv:v:40:y:2011:i:3:p:361-384
    DOI: 10.1080/1226508X.2011.601646
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    File URL: http://hdl.handle.net/10.1080/1226508X.2011.601646
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    Cited by:

    1. Donadelli, Michael & Persha, Lauren, 2014. "Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty," Research in International Business and Finance, Elsevier, vol. 30(C), pages 284-309.

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