The effects of country governance quality on the stability of equity markets

Abstract We examine the impact of governance quality on the volatility of equity markets. Using a broad dataset of ADRs, we provide evidence that high quality governance in the home country is associated with reduced stock market volatility. The relationship is robust across various governance quality dimensions. To address endogeneity concerns, we examine the stability of Brazilian ADRs in response to a corruption event. The inverse governance‐volatility relationship is clearly demonstrated by this event. The results support the conjecture that country governance quality is an important prerequisite for the stability of equity markets.