Governance quality and stock market returns: a comparative study of developed, emerging and frontier markets

A nation's ability to effectively execute regulations that protect investors and enhance stock market performance is directly correlated with its level of governance. The objective of this study is two-fold: 1) to empirically examine the short-term and long-term effects of governance quality, measured by indicators such as control of corruption (CCOR), government effectiveness (GEFF), political stability and absence of violence/terrorism (PSAV), regulatory quality (RQUA), rule of law (RLAW), and voice and accountability (VACC), on stock returns (SR) in developed, emerging, and frontier markets; 2) to analyse whether this relationship differs as a result of the market development level. Using a PMG/panel ARDL technique, the results suggest that there is a statistically significant long-term relationship between governance quality indicators and stock market returns in developed, emerging, and frontier markets, except for PSAV in emerging markets. Additionally, frontier markets are more sensitive to these effects than both developed and emerging markets. However, no such relationship was found in the short-term.