Abstract
BRICS nations are playing a critical role in the global economic setting, but to maintain sustained economic growth they are required to make relentless efforts towards certain challenges. These challenges pertain to diverse governance areas including political, socio-economic, and legal conditions. This paper unfolds the impact of the level of governance quality indicators on stock market development for BRICS nations during the period from 2007 to 2021. Using panel data regression, our empirical findings confirm that governance indicators are critical for the development of the stock market. Our results show that governance indicators such as Government Effectiveness, Rule of Law, and Voice and Accountability are significant variables affecting the stock market development. We find that giving citizens more autonomy to participate in the formulation and execution of policies, improves the development of stock markets. Similarly, lesser political influence will also lead to better growth of the stock market. Additionally, the study evidence that a stronger legal environment in BRICS nations promotes lesser corrupt practices such as insider trading, but at the same time hinders the growth of the stock market. Policymakers in BRICS nations should follow a consistent policy to improve their governance indicators which are now becoming essential for stock market development.
This is a preview of subscription content, log in via an institution to check access.
Source: Authors’ calculations
Source: Authors’ calculations
Similar content being viewed by others
References
Aggarwal, R., Klapper, L., & Wysocki, P. D. (2005). Portfolio preferences of foreign institutional investors. 28.
Ajide, F. M. (2019). Democracy And Stock Market Development: The Case Of Nigeria. The Journal of Developing Areas. https://doi.org/10.1353/jda.2019.0042
Anderson, A., & Gupta, P. P. (2009). A cross-country comparison of corporate governance and firm performance: Do financial structure and the legal system matter? Journal of Contemporary Accounting & Economics, 5(2), 61–79. https://doi.org/10.1016/j.jcae.2009.06.002
Anjum, S. (2020). Impact of market anomalies on stock exchange: A comparative study of KSE and PSX. Future Business Journal, 6(1), 1. https://doi.org/10.1186/s43093-019-0006-4
Barbu, T. C., & Boitan, I. A. (2020). Financial system performance in European union countries: Do country’s governance indicators matter? Journal of Business Economics and Management, 21(6), 1646–1664. https://doi.org/10.3846/jbem.2020.13633
Bhattacharya, U., & Daouk, H. (2002). The World Price of Insider Trading. The Journal of Finance, 57(1), 75–108. https://doi.org/10.1111/1540-6261.00416
Boadi, I., & Amegbe, H. (2017). The link between quality of governance and stock market performance: International level evidence. European Journal of Government and Economics, 6(1), 78–101. https://doi.org/10.17979/ejge.2017.6.1.4324
Chakraborty, B., Chatterjee, M., & Bhattacharjee, T. (2022). Impact of analyst report on the behavior of retail investors: A study during COVID-19 in India. Journal of Financial Reporting and Accounting., 21(5), 1188–1205.
Chen, K. C. W., Chen, Z., & Wei, K. C. J. (2009). Legal protection of investors, corporate governance, and the cost of equity capital. Journal of Corporate Finance, 15(3), 273–289. https://doi.org/10.1016/j.jcorpfin.2009.01.001
Chinn, M. D., & Ito, H. (2006). What Matters for Financial Development? Capital Controls, Institutions, and Interactions. Journal of Development Economics, 81(1), 163–192.
Chiou, W.-J.P., Lee, A. C., & Lee, C.-F. (2010). Stock return, risk, and legal environment around the world. International Review of Economics & Finance, 19(1), 95–105. https://doi.org/10.1016/j.iref.2009.05.001
Chui, A. C. W., Titman, S., & Wei, K. C. J. J. (2001). Momentum, legal systems and ownership structure: An analysis of Asian stock markets. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.265848
Doidge, C., Karolyi, G. A., & Stulz, R. M. (2007). Why do countries matter so much for corporate governance? Journal of Financial Economics, 86(1), 1–39.
Ernest, C. W., David, S., & Jones, A.-N. (2016). Relationship between institutional quality and stock market performance: Evidence from emerging economies. African Journal of Business Management, 10(19), 469–484. https://doi.org/10.5897/AJBM2016.8153
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383. https://doi.org/10.2307/2325486
Gujarati, D. (2014). Econometrics by example (2nd ed.). Red Globe Press.
Guru, B. K., & Yadav, I. S. (2019). Financial development and economic growth: Panel evidence from BRICS. Journal of Economics, Finance and Administrative Science, 24(47), 113–126. https://doi.org/10.1108/JEFAS-12-2017-0125
Goldman Sachs Report (2005). BRICS AND BEYOND. https://www.goldmansachs.com/insights/archive/archive-pdfs/brics-book/brics-full-book.pdf Accessed on 20–07–2022.
Hooker, M. A. (2004). Macroeconomic factors and emerging market equity returns: A Bayesian model selection approach. Emerging Markets Review, 5(4), 379–387. https://doi.org/10.1016/j.ememar.2004.09.001
Hooper, V., Sim, A. B., & Uppal, A. (2009). Governance and stock market performance. Economic Systems, 33(2), 93–116. https://doi.org/10.1016/j.ecosys.2009.03.001
Imran, Z. A., Ejaz, A., Spulbar, C., Birau, R., & Nethravathi, P. S. R. (2020). Measuring the impact of governance quality on stock market performance in developed countries. Economic Research-Ekonomska Istraživanja, 33(1), 3406–3426. https://doi.org/10.1080/1331677X.2020.1774789
Imran, Z. A., Wong, W. C., & Binti Ismail, R. (2022). Governance quality and momentum returns: International evidence. Journal of Economic and Administrative Sciences. https://doi.org/10.1108/JEAS-10-2021-0218
John, K., Litov, L., & Yeung, B. (2008). Corporate Governance and Risk-Taking. The Journal of Finance, 63(4), 1679–1728. https://doi.org/10.1111/j.1540-6261.2008.01372.x
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The Worldwide Governance Indicators: Methodology and Analytical Issues. Hague Journal on the Rule of Law, 3(02), 220–246. https://doi.org/10.1017/S1876404511200046
Kaur, M., Yadav, S. S., & Gautam, V. (2013). Financial system development and foreign direct investment: A panel data study for BRIC countries. Global Business Review, 14(4), 729–742.
Kennedy, P. (2003). A guide to econometrics. MIT press.
Klapper, L. F., & Love, I. (2004). Corporate governance, investor protection, and performance in emerging markets. Journal of Corporate Finance, 10(5), 703–728.
La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. The Journal of Finance, 52(3), 1131–1150. https://doi.org/10.1111/j.1540-6261.1997.tb02727.x
Lakshmi, G., Saha, S., & Bhattarai, K. (2021). Does corruption matter for stock markets? The role of heterogeneous institutions. Economic Modelling, 94, 386–400.
Lee, C., Chung, K. H., & Yang, S. (2016). Corporate governance and the informational efficiency of prices: Corporate governance and the IEP. Financial Management, 45(1), 239–260. https://doi.org/10.1111/fima.12104
Lehkonen, H., & Heimonen, K. (2015). Democracy, political risks and stock market performance. Journal of International Money and Finance, 59, 77–99. https://doi.org/10.1016/j.jimonfin.2015.06.002
Levine, R., & Zervos, S. (1996). Stock market development and long-run growth. The World Bank Economic Review, 10(2), 323–339.
Liu, L. (2024). External governance oversight and the IPO process: Empirical evidence from China. Asia-Pacific Financial Markets. https://doi.org/10.1007/s10690-024-09451-0
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. https://doi.org/10.1080/1226508X.2011.601646
Low, S.-W., Tee, L.-T., & Kew, S.-R. (2014). Does the quality of governance matter for equity market risk? Evidence from emerging and developed equity markets. Journal of Business Economics and Management, 16(3), 660–674. https://doi.org/10.3846/16111699.2012.720595
Mauro, P. (1995). Corruption and Growth. The Quarterly Journal of Economics, 110(3), 681–712. https://doi.org/10.2307/2946696
Narayan, P. K., Sharma, S. S., & Thuraisamy, K. S. (2015). Can governance quality predict stock market returns? New global evidence. Pacific-Basin Finance Journal, 35, 367–380. https://doi.org/10.1016/j.pacfin.2015.02.007
Nayyar, D. (2013). Catch up: Developing countries in the world economy. OUP Oxford.
Ogbeide, S., & Akanji, B. (2018). Stock market development and economic growth of Brazil, Russia, India, China and South African (BRICS) Nations: An empirical research. Accounting. https://doi.org/10.5267/j.ac.2017.6.001
O’Neil, J. (2001). Building better global economic BRICS. Goldman Sachs global economic paper No. 66.
Panda, P. (2023). Innovative financial instruments and investors’ interest in indian securities markets. Asia-Pac Financ Markets, 30, 1–12. https://doi.org/10.1007/s10690-023-09403-0
Panwar, K., Yadav, M. P., & Puri, N. (2023). Spillover Effect of Green Bond with Metal and Bullion Market. Asia-Pacific Financial Markets. https://doi.org/10.1007/s10690-023-09443-6
Shleifer, A., & Vishny, R. W. (1997). A Survey of Corporate Governance. The Journal of Finance, 52(2), 737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Statista (2021) Report on BRICS GDP. https://www.statista.com/statistics/254281/gdp-of-the-bric-countries/#statisticContainer Accessed on 09–08–2022.
SGI Network (2012). Governance Capacities in the BRICS. https://www.sgi-network.org/docs/publications/Governance_Capacities_in_the_BRICS.pdf Accessed as on 05–08–2022.
Su, Y., Li, J., Yang, B., & An, Y. (2023). The Impacts of Policy Uncertainty on Asset Prices: Evidence from China’s Market. Asia-Pacific Financial Markets. https://doi.org/10.1007/s10690-023-09442-7
Vijayakumar, N., Sridharan, P., & Rao, K. C. S. (2010). Determinants of FDI in BRICS Countries: A panel analysis. International Journal of Business Science & Applied Management (IJBSAM), 5(3), 1–13.
Wang, Y., & You, J. (2012). Corruption and firm growth: Evidence from China. China Economic Review, 23(2), 415–433. https://doi.org/10.1016/j.chieco.2012.03.003
World Bank data (2019). https://brics2021.gov.in/about-brics Accessed on 07–07–2022.
Yadav, M. P., Khera, A., & Dhanda, N. (2022). Determinants of stock returns of Indian Banks: An evidence of balanced panel regression. JIMS8M the Journal of Indian Management and Strategy, 27(4), 38–46.
Yadav, M. P., & Sharma, S. (2022). Volatility Spillover between Chinese Stock Market and selected Emerging Economies: A Dynamic Conditional Correlation and Portfolio Optimization Perspective. Asia-Pac Financ Markets. https://doi.org/10.1007/s10690-022-09381-9
Yartey, C. A. (2012). The Determinants of Stock Market Development in Emerging Economies: Is South Africa Different?.
Yadav, S., & Yadav, M. P. (2021). Female Director and Agency Cost: Does board genderdiversity at Indian corporate board reduce agency conflict? Transnational Marketing Journal, 9(3), 587–596.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Khan, A., Verma, R., Yadav, M.P. et al. Does Governance Quality Impact Stock Market Development? An Insight of BRICS Economies. Asia-Pac Financ Markets (2024). https://doi.org/10.1007/s10690-024-09462-x
Accepted:
Published:
DOI: https://doi.org/10.1007/s10690-024-09462-x