Momentum, Legal Systems and Ownership Structure: An Analysis of Asian Stock Markets

Abstract

This paper examines momentum profits in eight Asian markets with a focus on ownership structure, legal systems and valuation uncertainty. The results indicate that momentum strategies, which buy past winners and sell past losers, are highly profitable when implemented on Asian stock markets outside Japan. Interestingly, the common law/civil law distinction provides a perfect indicator of whether or not a market exhibited a momentum effect prior to the financial crisis. Consistent with the previous findings in the U.S., we document that the momentum effect is relatively stronger for firms with smaller market capitalizations, lower book-to-market ratios, and higher turnover ratios. In addition, we document that the momentum effect is stronger for independent firms than for group-affiliated firms and present weak evidence that suggests that foreign ownership can influence the momentum effect in Japanese firms. We also find return reversals around nine or ten months after the portfolio formation date, which supports the prediction of some behavioral models.

Keywords: Momentum, legal systems, ownership structure, Asian stock markets

JEL Classification: F3, G1