Main Article Content

Isaac Boadi
School of Management, Open University, Heelen
Hayford Amegbe
University of Nairobi, School of Business
Vol. 6 No. 1 (2017), Articles, pages 78-101
Submitted: Sep 24, 2018 Published: Jul 7, 2017
How to Cite


The present study investigates the link between quality of governance and stock market performance within the context of international markets. The study employed the Fixed Effect model using 23 countries with complete relevant data for the period spanning from 1996 to 2014. The study reveals that, quality of governance as captured by Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption significantly affect stock market performance. Varying effects are produced when the countries are decomposed into income classifications. What is more, the findings and suggestions of this study suggest that quality of government significantly affect foreign direct investment and could have interesting policy implications. The main value of this paper is to examine the link between quality of governance and stock market performance within the context of international markets.


Download data is not yet available.

Article Details


Aggarwal, R., Klapper, R., & Wysocki, P.D. (2002). Portfolio preferences of foreign institutional investors. MIT Sloan Working Paper 4328-03.

Aktas, H., & Oncu, S. (2006). The stock market reaction to extreme events: the evidence from Turkey. International Research Journal of Finance and Economics 6(6), 78-85.

Albuquerque, R., & Wang, N. (2008). Agency conflicts, investment, and asset prices. Journal of Finance 63, 1-40.

Bailey, B. A., Heck, J. L., & Wikens, K. A. (2005). International mutual fund performance and political risk. Review of Pacific Basin Financial Markets and Policies 8(1), 167-184.

Bailey, W., & Chung, Y. P. (1995). Exchange rate fluctuations, political risk and stock returns: some evidence from an emerging market. Journal of Financial and Quantitative Analysis 30(4), 541–562.

Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics 29(1), 1–51.

Bartels, F. L., Alladina, S. N., & Lederer, S. (2009). Foreign Direct Investment in Sub-Saharan Africa: Motivating Factors and Policy Issues. Journal of African Business 10(2), 141-162.

Beaulieu, M. C., Cosset, J. C., & Essaddam, N. (2006). Political uncertainty and stock market returns: evidence from the 1995 Quebec referendum. The Canadian Journal of Economics/Revue canadienne d'économique 39(2), 621-641.

Bechtel, M. M. (2009). The political sources of systematic investment risk: lessons from a consensus democracy. The Journal of Politics 71(2), 661-677.

Bekaert, G., & Harvey, C. (2000). Foreign speculators and emerging equity markets. Journal of Finance 55(2), 565—613.

Bekaert, G., & Harvey, C. R. (2003). Emerging markets finance. Journal of Empirical Finance 10(1), 3−56.

Bittlingmayer, G. (1998). Output, stock volatility, and political uncertainty in a natural experiment: Germany 1880–1940. Journal of Finance 53(6), 2243–2258.

Breitung, J. (2001). The local power of some unit root tests for panel data. In B. H. Baltagi, T. B. Fomby, & R. Carter Hill (Eds.), Nonstationary Panels, Panel Cointegration, and Dynamic Panels (Advances in Econometrics 15, pp. 161-177). Emerald Group Publishing Limited.

Bruno, V, & Claessens, S. (2010). Corporate governance and regulation: Can there be too much of a good thing? Journal of Financial Intermediation 19(4), 61–82.

Chen, C. W., Chen, Z., & Wei, J. K. C. (2009). Legal protection of investors, corporate governance, and the cost of equity capital. Journal of Corporate Finance 15(3), 273-289.

Chiou, W. J. P., Lee, A. C., & and Lee, C. F. (2010). Stock return, risk, and legal environment around the world. International Review of Economics and Finance 19(1), 95–105.

Chiu, C. L., Chen, C. D., & Tang, W. W. (2005). Political elections and foreign investor trading in South Korea's financial markets. Applied Economics Letters 12(11), 673-677.

Claessens, S., & Laeven, L. (2003). Financial development, property rights, and growth. Journal of Finance 58(6), 2401–2436.

Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: a survey. Emerging Market Review 15(1), 1–33.

Clark, R. A. (2003). African Securities Market Designs. Journal of African Business 4(3), 83-102.

Darley, W. K. (2012). Increasing Sub-Saharan Africa's Share of Foreign Direct Investment: Public Policy Challenges, Strategies, and Implications. Journal of African Business 13(1), 62-69.

Diamonte, L. R., Liew, M. J., & Stevens, L. R. (1996). Political risk in emerging and developed markets. Journal of Portfolio Management 52(3), 71-76.

Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2003). Courts. Quarterly Journal of Economics 118, 453−517.

Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A., (2008). The law and economics of self-dealing. Journal of Financial Economics 88(3), 430–465.

Doidge, C., Karolyi, A. G., & Stulz, R. M. (2007). Why do countries matter so much for corporate governance? Journal of Financial Economics 86(1), 1-39.

Dooley, M. (1998). A Model of Crises in Emerging Markets. NBER Working Paper 6300. Cambridge, Mass.: National Bureau of Economic Research.

Durnev, A, & Han Kim, E. (2005). To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation. Journal of Finance 60, 61–93.

Erb, C., Harvey, C., & Viskanta, T. (1996). Expected returns and volatility in 135 countries. Journal of Portfolio Management 25, 46–58.

Feils, D.A. (2000). The impact of political risk on the foreign direct investment decision: a capital budgeting analysis. Emerging Economist 45, 129-143.

Ferguson, N. (2006). Political risk and the international bond market between the 1848 revolution and the outbreak of the First World War. Economic History Review 59, 70-112.

Fisman, R. (1991). Estimating the value of political connections. American Economic Review 94, 1095-102.

Frey, B. S., & Waldenstrom, D. (2004). Markets work in war: WorldWar II reflected in the Zurich and Stockholm bond markets. Financial History Review 11, 51-67.

Gelos, R. G., & Wei, S.-J. (2006). Transparency and international investor behavior. IMF Working Paper 02/174.

Giannetti, M., & Koskinen, Y. (2010). Investor protection, equity returns, and financial globalization. Journal of Financial and Quantitative Analysis 45, 135-168.

Gul, F., & Qui, H. (2002). Legal protection, corporate governance and information asymmetry in emerging financial markets. SSRN Working Paper.

Gupta, S., Davoodi, H., & Tiongson, E. (2001). Corruption and the provision of health care and education services. In A. K. Jain (Ed.), The Political Economy of Corruption (pp. 111-141), NY: Routledge.

Haendel, D., West, G. T., & Meadow, R. G. (1975). Overseas investment and political risk (No. 21). Foreign Policy Research Institute.

Hail, L., & Leuz, C. (2006). International differences in the cost of equity capital: Do legal institutions and securities regulation matter? Journal of Accounting Research 44, 485- 531.

Hail, L., & Leuz, C. (2003). International differences in the cost of equity capital: do legal institutions and securities regulation matter?" ECGI—Law Working Paper 15/2003, Brussels.

Harris, R. D., & Tzavalis, E. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of econometrics 91(2), 201-226.

Harvey, C. (1995). Predictable risk and returns in emerging markets. Review of Financial Studies 8(3), 773-816.

Hausman, J. A. (1978), "Specification tests in econometrics". Econometrica 46(6), 1251–1272.

Henry, P. B. (2000), "Stock market liberalization, economic reform, and emerging market equity prices", Journal of Finance 55(2), 529−564.

Hooper, V., Sim, A. B., & Uppal, A. (2009). Governance and stock market performance. Economic Systems 33(2), 93–116.

Im, K. S., M. H. Pesaran, & Shin, Y. (2003). Testing for unit roots in heterogeneous panels". Journal of Econometrics 115(1), 53-74.

Ismail, I., & Suhardjo, H. (2001). The impact of Domestic political events on an emerging stock market: the case of Indonesia. Proceedings of Asia Pacific Management Conference, 235-262.

Javed, A. Y., & Ahmed, A. (1999). The Response of Karachi stock exchange to nuclear detonation. The Pakistan Development Review 38(4), 777-786.

Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (1998). Regulatory discretion and the unofficial economy. American Economic Review 88(1), 387-92.

Jorion, P., & Geotzmann, W. N. (1999). Global stock markets in the twentieth century. Journal of Finance 54(3), 953-980.

Kaufmann, D., Kraay, A., & Mastruzzi, M. (2009). Governance matters VIII: Aggregate and individual governance indicators 1996–2008. World Bank Policy Research Working Paper No. 4978.

Klapper, L., & Love, I. (2004). Corporate governance, investor protection, and performance in emerging markets. Journal of Corporate Finance 10(5), 703-723.

Klitgaard, R. (1991). Gifts and bribes. In R. J. Zeckhauser (Ed.), Strategy and Choice, Cambridge, MA: The MIT Press.

Kobrin, S. (1979). Political risk: a review and reconsideration. Journal of International Business and Studies 10(1), 67-80.

Krishnamurti, C., Sevic, A., & Sevic, Z. (2005). Legal environment, firm-level corporate governance and expropriation of minority shareholders in Asia. Economic Change and Restructuring 38(8), 85–111.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance 52(3), 1131-1150.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy 106(6), 1113-1155.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1999). The quality of government. Journal of Law, Economics, and Organization 15(1), 222-79.

La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (2000). Agency problems and dividend policies around the world. The Journal of Finance 55(1), 1-33.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (2002). Investor protection and corporate valuation. Journal of Finance 57(3), 1147-1170.

Lee, C., & Ng, D. (2004). Corruption and international valuation: does virtue-pay. Cornell University working paper.

Lehkonen, H., & Heimonen, K. (2015). Democracy, political risks and stock market performance. Journal of International Money and Finance 59(1), 77–99.

Li, S., & Filer, L. (2007). The effects of the governance environment on the choice of investment mode and the strategic implications. Journal of World Business 42(1), 80- 98.

Liu, Q., Lu, R., & Ma, X. (2015). Corruption, Financial Resources and Exports. Review of International Economics 23(5), 1023-1043.

Lombardo, D., & Pagano, M. (2000). Legal determinants of the return on equity. CSEF Discussion Paper 24, Naples.

Low, S.-W., Kew, S.-R., & Tee, L.-T. (2011). International Evidence on the Link between Quality of Governance and Stock Market Performance. Global Economic Review 40(3), 361–384.

Masood, O., & Sergi, B. S. (2008). How political risks and events have influenced Pakistan's stock markets from 1947 to present. Economic Policy in Emerging Economies 1(4), 427-444.

Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics 110(3), 681-712.

McKinnon, R., & Pill, H. (1997). Credible Economic Liberalizations and Over borrowing. American Economic Review 87(2), 189–93.

Milyo, J. (2012). Stock market reactions to political events: what can we learn about the efficacy of political connection? Working Paper No. 12-15. Washington DC: Mercatus Center, George Mason University.

Mobarak, A. M. (2005). Democracy, volatility, and economic development. Review of Economic and Statistics 87(2), 348–361.

Munteanu, A., & Brezeanu, P. (2014). Government Effectiveness And Value Creation: The Case Of Emerging European Listed Banks. Transylvanian Review of Administrative Sciences 10(42), 140–155.

Mutenheri, E., & Green, C. J. (2003). Financial Reform and Financing Decisions of Listed Firms in Zimbabwe. Journal of African Business 4(2), 155-170.

Ng, D. (2006). The impact of corruption on financial markets. Managerial Finance 32(10), 822–836.

Ngugi, R. W., Murinde, V., & Green, C. J. (2003). How have the emerging stock exchanges in Africa responded to market reforms? Journal of African Business 4(2), 89-127.

Onder, Z., & Simga-Mugan, M. C. (2006). How do political and economic news affect emerging markets? Evidence from Argentina and Turkey. Emerging Markets Finance and Trade 42(4), 50-77.

Perotti, E.C., & van Oijen, P. (2001). Privatization, political risk and stock market development in emerging markets. Journal of International Money and Finance 20(1), 43–69.

Rajan, R. G., & Zingales, L. (2003). The great reversals: the politics of financial development in the twentieth century. Journal of Financial Economic 69(1), 5–50.

Robock, S. (1971). Political risk: identification and assessment. Columbia Journal of World Business 6(4), 6-20.

Shleifer, A., & Vishny, R. W. (1993). Corruption. Quarterly Journal of Economics 108(3), 599-617.

Simplice A. (2011). Government Quality Determinants of Stock Market Performance in African Countries. AGDI Working Paper No. WP/11/019

Tanzi, V., & Davoodi, H. (1997). Corruption, public investment, and growth. Working Paper 97/139. Washington, DC: International Monetary Fund.

Toumi, K. (2011). The Role of the Investment Climate and Tax Incentives in the Foreign Direct Investment Decision: Evidence from South Africa. Journal of African Business 12(1), 133- 147.

Transparency International (1995). Building a Global Coalition against Corruption. Annual report. Berlin: Transparency International.

Wei, S. J. (1997). How taxing is corruption on international investors? Working Paper 6030.Washington, DC: NBER.

Willard, K., Guinnane, T., & Rosen, H. (1996). Turning points in the Civil War: views from the Greenback market. American Economic Review 86(4), 1001–18.