Investigation into the impact of governance quality on stock price momentum in international stock markets

Momentum returns are considered an anomaly in the finance literature as their existence cannot be explained by the asset pricing paradigm. This study attempts to shed more light into this anomaly by investigating into the existence and the determinants of momentum returns for a sample of 40 countries worldwide for the period of 1996 to 2018. The key explanation to the momentum returns is about governance quality proxied by World Governance Indicators (WGI) and Corporate Governance Indicators (CGI). Univariate test results reveal a monthly average momentum returns of 0.25 percent with 90 percent of the sample countries exhibit significant momentum effect. Besides, regression analysis shows a negative and significant relationship between WGI and momentum returns. This negative coefficient value supports the prediction of overreaction hypothesis which postulates lower behavioural bias in the market with high governance or institutional quality. Furthermore, the interaction results suggested that the negative impact of governance quality on momentum returns could be altered by the level of information uncertainty faced by individual firms as proxied by trading volume, volatility, size and book-tomarket ratio. There are two distinct contributions to the momentum literature from this study. First, it considers for the first time the impact of country and firm levels governance quality on momentum returns. Second, it is also the first to consider how governance quality can alter the relationship between information uncertainty and behavioural biases with the momentum returns. This study provides two implications; for portfolio managers, as momentum returns are higher in countries with low governance quality, thus portfolios managers should apply momentum strategies in these countries to earn abnormal momentum profits, and; for regulators, governance quality should be strengthened to reduce the abnormal returns that could stabilize the stock market operations.