Country Governance and International Equity Returns
67 Pages Posted: 11 Dec 2015 Last revised: 16 Jan 2018
Date Written: March 10, 2017
Monthly equity returns in countries with strong governance lead monthly equity returns in countries with weak governance. This predictability is robust to alternative ways of measuring country governance, and holds in and out-of-sample at both the group and individual country levels. Strong governance country equities react more quickly to global innovations, which contain value-relevant information for all countries. Information gradually diffuses from strong to weak governance countries, with the predictability being stronger when there is higher information asymmetry and opacity in weak governance countries. Other factors such as market segmentation, short-selling constraints, and trade linkages do not explain the predictability.
Keywords: Governance, Return Predictability, International Equity Markets, Information Diffusion, Slow Moving Capital
JEL Classification: G11, G14
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