Sentiment Contagion, Corporate Governance, Information and Legal Environments

49 Pages Posted: 3 Mar 2009

See all articles by Yuk Ying (Candie) Chang

Yuk Ying (Candie) Chang

Massey University

Robert W. Faff

University of Queensland

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2, 2009

Abstract

This paper studies impacts of US investor sentiment on non-US stock returns across 38 developed and developing equity markets. Employing data from 1977 to 2004, we find that US sentiment strongly influences future returns for various long-short portfolios designed to reflect sentiment prone stocks. The sentiment contagion is unlikely to be fully explained by the asset holdings of international investors. We find that the sentiment contagion is generally and significantly stronger when the information and legal environments are of high quality. We further document strong evidence that good corporate governance environments help diminish the spread of US investor sentiment across stock markets. Our results also suggest higher correlation for stocks with similar levels of sentiment sensitivity, such as small and high growth stocks, across markets, which will tend to reduce international diversification benefits.

Keywords: Investor Sentiment, Financial Contagion, Information Environment, Legal Environment, Corporate Governance

JEL Classification: G15, G14

Suggested Citation

Chang, Yuk Ying and Faff, Robert W. and Hwang, Chuan-Yang, Sentiment Contagion, Corporate Governance, Information and Legal Environments (March 2, 2009). Available at SSRN: https://ssrn.com/abstract=1352148 or http://dx.doi.org/10.2139/ssrn.1352148

Yuk Ying Chang (Contact Author)

Massey University ( email )

Palmerston North
New Zealand

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Chuan-Yang Hwang

Nanyang Technological University (NTU) ( email )

Singapore, 639798
Singapore
65-67905003 (Phone)
65-6791-3697 (Fax)

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