The quality of governance and momentum profits: International evidence

Mohamed Sherif, Jiaqi Chen

Research output: Contribution to journalArticle

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.

Original languageEnglish
Article number100835
JournalThe British Accounting Review
Volume51
Issue number5
Early online date16 May 2019
DOIs
Publication statusPublished - 1 Sep 2019

Keywords

  • Accountability
  • Cross-country investigation
  • Governance
  • Momentum profits

ASJC Scopus subject areas

  • Accounting

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