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Impacts of Macroeconomic Environment and Governance Quality on the Stock Market

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  • Ming, Kelvin Lee Yong

    (Faculty of Economics and Business, Universiti Malaysia Sarawak 94300 Sarawak, MALAYSIA.)

  • Jais, Mohamad

    (Faculty of Economics and Business, Universiti Malaysia Sarawak 94300 Sarawak, MALAYSIA.)

Abstract

This study examines the relationship between governance quality and stock market performance using the annual data from 2008 to 2016 for fourteen developing countries. This study used four different indicators, namely stock market return, stock market volatility, stock market development, and stock market liquidity to reflect the stock market’s performance from various aspects. The study further combined the four indicators and formed a new proxy to reflect overall stock market performance by using principal component analysis. The two-step system of GMM estimation was used to test the impact of the macroeconomic environment and governance quality on stock market performance. Specifically, the results obtained show that banking sector development and governance quality have a significant negative relationship with stock market volatility. Meanwhile, the income level has a significant negative relationship with stock market volatility, development, and liquidity. These results suggest that developing countries should strengthen the position of the banking sector and allows the funds to be channeled into the stock market efficiently. Besides that, developing countries also need to improve their governance quality to attract foreign investors. Several policies shall be implemented by the developing countries to improve governance quality in the aspects of voice and accountability, political stability, government effectiveness, regulatory quality, the rule of law, and control of corruption.

Suggested Citation

  • Ming, Kelvin Lee Yong & Jais, Mohamad, 2020. "Impacts of Macroeconomic Environment and Governance Quality on the Stock Market," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 54(3), pages 133-145.
    • Handle: RePEc:ukm:jlekon:v:54:y:2020:i:3:p:133-145
    DOI: http://dx.doi.org/10.17576/JEM-2020-5403-10
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    References listed on IDEAS

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    1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    2. Aggarwal, Reena & Klapper, Leora & Wysocki, Peter D., 2005. "Portfolio preferences of foreign institutional investors," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2919-2946, December.
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    Cited by:

    1. Koh, Sharon G. M. & Lee, Grace H. Y. & Siah, Audrey K. L., 2022. "The Resurgence of Income Inequality in Asia-Pacific: The Role of Trade Openness, Educational Attainment and Institutional Quality," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(3), pages 11-27.

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