Governance and Stock Market Performance

44 Pages Posted: 27 Sep 2005

See all articles by Vincent J. Hooper

Vincent J. Hooper

SP Jain School of Global Management

Ah Boon Sim

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Asfandyar Uppal

UNSW Australia Business School, School of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 2005

Abstract

This study uses international asset pricing models to investigate the link between the quality of government institutions and the performance of global stock markets. The results demonstrate a significant positive association between stock market performance measures and the quality of the institutional environment. Performance measures examined for the cross-section of countries were the average monthly stock index excess returns and the Sharpe ratio. All measures of performance were adjusted for global and local risk factors known to explain their international variation. The quality of governance is also found to be negatively associated with stock market total risk and idiosyncratic risk, consistent with the notion that stable institutions are linked to reduced variations in equity returns. These findings suggest countries with better-developed governance systems have stock markets with higher returns on equity and lower levels of risk. The results lend support for the view that a precondition for financial market development is the improvement of the institutions which govern the process of exchange.

Keywords: Governance, Stock Market Performance, Regression Estimates

JEL Classification: C33, G15, G39

Suggested Citation

Hooper, Vincent James and Sim, Ah Boon and Uppal, Asfandyar, Governance and Stock Market Performance (September 2005). Available at SSRN: https://ssrn.com/abstract=807204 or http://dx.doi.org/10.2139/ssrn.807204

Vincent James Hooper

SP Jain School of Global Management ( email )

Ah Boon Sim (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Asfandyar Uppal

UNSW Australia Business School, School of Banking and Finance

Sydney, NSW 2052
Australia

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