Governance quality

1. D E T E R M I N A N T S O F
G O V E R N A N C E Q U A L I T Y
O N S T O C K M A R K E T
P E R F O R M A N C E I N A S E A N
C O U N T R I E S
LIYANA SYAFINI BINTI JUMAAH
2020414316

2.  RESEARCH BACKGOUND
 PROBLEM STATEMENT
 RESEARCH OBJECTIVE &
RESEARCH QUESTION
 LITERATURE REVIEW &
RESEARCH FRAMEWORK
 RESEARCH METHODOLOGY
 FINDING & DISCUSSION
 RESEARCH IMPLICATION AND
CONTRIBUTION
 RECOMMENDATION &
CONSLUSION
CONTENT
S

3. WHAT IS STOCK MARKET?
 Platform or place for buying and
selling equities or stock
 Barometer of the country’s economic
and financial
 ASEAN Exchanges collaborated with
six countries:
i. Bursa Malaysia
ii. Indonesia Stock Exchange
iii. Singapore Exchange
iv. Hochiminh Stock Exchange
v. The Philippines Stock Exchange
vi. The Stock Exchange of Thailand
WHAT IS GOVERNANCE QUALITY?
 Governance is a term that refers to the
processes and mechanisms that each
country has in place to regulate how
power is exercised.
 The Worldwide Governance Indicators
(WGI) provide data on six fundamental
pillars of governance for over 200
countries worldwide from 1996 to 2020 :
i. Voice and Accountability
ii. Regulatory Quality index
iii. Political Stability and Absence of
Violence
iv. Government Effectiveness
v. Rule of Law
vi. Control of Corruption

4. PROBLEM STATEMENT
 Shamsudin et al., (2021), stock market
performance tends to influence by
macroeconomics factors:
 Interest Rate
 Currency rate
 Inflation rate
 Money Supply
 Oil Price
 Argued by Yartey (2008) , another issue to
consider when foreign investors make
investment choices is political risk.
RESEARCH OBJECTIVE
 To ascertain the link between governance
quality and stock market performance in
ASEAN member states
 To conduct a long-run analysis of the link
between governance and. quality stock
market performance
 To analyse which governance quality
strongly influence stock market
performance in ASEAN countries.
RESEARCH QUESTION
 What is the link between governance quality
and ASEAN member nations' stock market
performance?
 Is there a long-term relationship between
governance quality and stock market
performance?
 Which governance quality strongly
influence on stock market performance in
ASEAN countries?

5. L I T E R AT U R E R E V I E W
Voice and Accountability and Stock Market
Performance
 Modugu, K. P., & Dempere, J. (2020),
indicate that freedom of expression,
association, journalism, and social media,
as well as government accountability, may
not always convert into higher equity
returns.
 Abed Masrorkhah & Lehnert, (2017), Press
freedom is the most important factor
influencing stock market volatility.
Additionally, press freedom has been linked
to increased levels of welfare and economic
progress. Apart from the stock market, a
free and independent press is vital to a
society's economic progress.
 Asongu, (2011), revealed that democracies
have an influence on the growth of the stock
market in Africa which channel of
democracy is press-freedom qualities to
account for stock market performance.

6. Political Stability and Absence of Violence/
Terrorism and Stock Market Performance
 Abdulmuhsen, A. Z. &, &
MohamedRasheed, M. B. (2020), the
result was political stability index and
global terrorism index have significantly
positive with Iraq stock exchange.
Terrorist activities create direct converse
impact on investors and state business
environment and in that political tensions
and turmoil has an effect on the stability
of stock market.
 Irshad, (2017), reported that political
instability in Pakistan has significant
negative relationship with stock market
return in the long run.
 Permana, (2016), The data demonstrated
unequivocally that the stock market does
not respond to political stability either 70
days before or 70 days after an Indonesia
Presidential Election.


7. Government Effectiveness and Stock Market
Performance
 Dar et al., (2020) , the bureaucratic quality
coefficient is positive and significant with
Foreign Direct Investment (FDI) in Pakistan,
Idia, Sri Lanka & Bangladesh by using
Driscoll and Kraay’s standard errors
approach.
 Hussain et al., (2017), strong positive
relationship between government
effectiveness and stock market
performance also using panel VECM model
for south Asian economies from 1989-2015 .
Regulatory Quality Index and Stock Market
Performance
 Umar & Nayan, (2018), revealed the impact
of regulatory quality index on market
capitalization is positive and statistically
significant. The results indicate that an
index increase of regulatory quality leads to
increase market capitalization. This is line
with the finding as strong and effective
regulation can lead to improvement in
market returns.
 Boadi & Amegbe, (2018), regulatory quality
index (RQUA) had no significant impact on
EQIND among both high and upper middle
income countries, the impact was positive
and significant among the lower middle
income countries. Thus, lower income
countries would benefit significantly from
improvement in regulatory quality.

8. Rule of Law and Stock Market Performance
 Dima et al., (2018), empirical evidence for a
data set of 45 countries and for a time span
between 2009 and 2014 appeared that the
rule of law exercises a positive and
significant impact on market capitalisation
which is robust across various estimation
methods and across different model
specifications.
 Khan & Siddiqui, (2017), the most effective
result is rule of law which has positive
relation with stock returns and shows
significance in 24 emerging and developed
countries.. This means that when the law
and order is executed there is an increase in
the stock market performance.
Control of Corruption and Stock Market
Performance
 Lakshmi et al., (2021), corruption has a
major negative impact on the return on
inventories of BRIC nations since it not only
increases the cost of production but also
causes uncertainty and risk on the demand
side. Corruption erode businesses'
profitability, resulting in a decreased rate of
return on equities and erode investor
confidence, which is detrimental given that
BRICs are major destinations for FDI and
other forms of investment.
 Alsherfawi Aljazaerli et al., (2016),
Corruption had a positive impact on stock
market development through its impact on
FDI, acting as “grease” by expediting
transactions and allowing private firms to
overcome ineffective regulations and
governmental institutions

9. DEPEDENT
VARIABLE
SIGNIFICANT (-) SIGNIFICANT (+) INSIGNIFICANT (+ / -)
STOCK MARKET
PERFORMANCE
INDEPENDEDENT
VARIABLE
VOICE AND
ACCOUNTABILITY
Modugu, K. P., &
Dempere, J. (2020),
Abed Masrorkhah &
Lehnert, (2017),
POLITICAL
STABILITY AND
ABSENCE OF
VIOLENECE
Irshad, (2017), Abdulmuhsen, A. Z.
&, &
MohamedRasheed,
M. B. (2020),
GOVERNMENT
EFFECTIVENESS
Dar et al., (2020) Hussain et al., (2017),
REGULATORY
QUALITY INDEX
Umar & Nayan,
(2018),
Boadi & Amegbe,
(2018),
RULE OF LAW Dima et al., (2018),
Khan & Siddiqui,
(2017),
CONTROL OF Lakshmi et al., (2021), Alsherfawi Aljazaerli

10. R E S E A R C H
M E T H O D O L O G Y
Data
 Time Frame: 2002 – 2020
 Nature of Data: Panel Data
 Dependent Variable:
Equity Index (EQIND)
 Independent Variable:
i. Voice and Accountability (VACC)
ii. Political stability and Absence of
Violence
(PSAV)
iii. Government Effectiveness (GEF)
iv. Regulatory Quality Index (RQUA)
v. Rule of Law (ROL)
vi. Control of Corruption (COC)
 Country Region: ASEAN (Malaysia,
Indonesia, Singapore, Thailand, Vietnam
& Philippines)

11. Methodology
Theory /
Empirical
Studies
Hypothesi
s
Statement
Stationary
Test on
Variables
Descriptiv
e
Analysis
Normality
Test
Panel
Least
Square
Durbin
Watson
Panel
cointegrat
ion Fully
Modified
OLS
(FMOLS)

12. FINDING AND
DISCUSSION

13. ADF TEST
Levels Variables Lag Tau Pr < Tau
Without drift DEQIND 1 75.5508*** 0.0000
DVACC 1 65.2519*** 0.0000
DRQUA 1 60.7774*** 0.0000
DROL 1 60.4746*** 0.0000
DPSAV 1 86.0786*** 0.0000
DGEF 1 61.4040*** 0.0000
DCOC 1 58.5130*** 0.0000
With drift DEQIND 1 60.6887*** 0.0000
DVACC 1 37.4116*** 0.0002
DRQUA 1 38.2474*** 0.0001
DROL 1 36.4631*** 0.0003
DPSAV 1 57.1175*** 0.0000
DGEF 1 40.6391*** 0.0001
DCOC 1 33.9020*** 0.0007
With drift DEQIND 1 48.5759*** 0.0000
and trends DVACC 1 29.5433*** 0.0033
DRQUA 1 28.0663*** 0.0054
DROL 1 30.7726*** 0.0021
DPSAV 1 54.9636*** 0.0000
S TAT I O N A R Y T E S T

14. D E S C R I P T I V E A N A LY S I S
EQIND VACC RQUA ROL PSAV GEF COC
Mean 2292.976 -4.041 0.2951 0.1210 -2.4333 0.5218 0.0326
Median 1624.270 -0.2216 0.0610 -0.1713 -0.0324 0.1902 -0.4035
Maximum 8558.418 0.3215 2.2605 1.8789 1.6157 2.4370 2.3256
Minimum 165.570 -1.5385 -0.7959 -0.9140 -2.0946 -0.4831 -1.1440
Std. Dev 1959.250 0.5439 0.8445 0.8051 0.9602 0.8657 1.0145
Skewness 1.3398 -0.9493 1.0263 1.0267 0.1440 0.9515 1.4318
Kurtosis 4.0667 2.5852 2.9835 2.8089 2.0313 2.5968 3.5285
Jarque-Bera 37.4333 16.9969 18.9611 19.1378 4.5959 17.0266 38.1585
Probability 0.0000 0.0002 0.0001 0.0001 0.1005 0.0002 0.0000

15. N O R M A L I T Y T E S T

16. PA N E L L E A S T S Q U A R E
Variable Coefficient t-Statistic Prob.
C 3027.037 6.2735 0.0000
VACC 2140.854*** 5.4524 0.0000
RQUA 1629.592 1.3226 0.1890
ROL -4395.845*** -3.0693 0.0028
PSAV 830.9187** 2.0730 0.0407
GEF 692.1736 0.6864 0.4940
COC 703.6574 1.0112 0.3144
R-squared 0.4166 Durbin-Watson
Stat
0.2335
Adjusted R2 0.3819
F-statistic 12.0182
Prob(F-statistic) 0.0000

17. PA N E L C O I N T E G R AT I O N F U L LY
M O D I F I E D O L S ( F M O L S )
Variable Coefficient t-Statistic Prob.
VACC -1269.201 -1.5088 0.1346
RQUA 2923.623** 2.4419 0.0164
ROL -2358.376* -1.7931 0.0761
PSAV 1669.167*** 3.2610 0.0015
GEF 1705.016 1.3081 0.1940
COC 3867.812*** 2.7658 0.0068
R-squared 0.7992 Long-run variance 0.2335
Adjusted R2 0.7761

18. R E S E A R C H I M P L I C AT I O N &
C O N T R I B U T I O N
Implication
 Policy makers and regulators should develop a
holistic strategy for the development of stock
markets.
 Regulators should seek to ensure that stock
markets are fair and efficient for capital raising.
Increasing institutional investor participation,
providing diversified investment choices, and
ensuring market confidence should be high
priorities on investors agenda.
 Securities regulators should have adequate
powers, proper resources and the capacity to
perform regulators functions and exercise
regulators powers.
 Jurisdictions should establish strong
national and international cooperation
arrangements to develop stock markets with
the key involvement of the securities
regulator.
 Regulators and market participants should
develop and implement efficient roadmaps
for investor education and guidance
Contribution
 Body of Knowledge
i. Introducing under-researched study region
ii. Provide the latest data and results for
references.
iii. Highlight the different factors involving
stock market performance

19. R E C O M M E N D AT I O N & C O N C L U S I O N
Recommendation
 Future / Further Research
i. Conduct comparative analysis for
macroeconomics and governance
quality towards stock market
performance.
ii. Intensify and extend research in the
ASEAN area.
Conclusion
 The findings showed that determinants of
governance quality have relationship with
stock market performance which meet the
first research objective.
 There are only regulatory quality index, rule
of law, political stability and absence of
violence and control of corruption have
long-run relationship and give impact on
stock market performance
 Rule of law and political stability and
absence of violence strongly influence
stock market performance.