The quality of governance and momentum profits: International evidence

Mo Sherif and Jiaqi Chen

The British Accounting Review, 2019, vol. 51, issue 5

Abstract: This paper examines the presence of momentum (sell past losers and buy past winners) and proposes accountability, level of corruption, and governance effectiveness as a novel explanation for return continuation phenomena in an international setting. In essence, we test the possibility of beating the international stock markets and producing abnormal profits from momentum investing. We found that both accountability and level of corruption are significantly correlated with government effectiveness. Countries and institutional environments with better scores on the accountability and control of corruption indices maintain better levels of governance effectiveness. In addition, through an analysis of the international momentum strategies, the paper shows that the quality of governance as captured by accountability, government effectiveness, and control of corruption, significantly affect the international momentum profits. Overall, the findings explain the presence of momentum and add a fresh dimension to the literature that the quality of governance influences the stability of financial markets, which is of significant importance in understanding pricing effects and stock market anomalies. Our findings are robust, having been subjected to a range of robustness checks.

Keywords: Governance; Accountability; Momentum profits; Cross-country investigation (search for similar items in EconPapers)
JEL-codes: G11 G14 G15 G34 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:51:y:2019:i:5:s0890838919300484

DOI: 10.1016/j.bar.2019.05.001

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