TIME-VARYING RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND EXPECTED STOCK RETURNS

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Abstract

This paper aims to analyze a time-varying relationship between corporate governance and expected stock returns in Thailand. The time variation of corporate governance premium is estimated by macroeconomic determinants using a two-state Markov switching model. The results indicate the presence of asymmetries in the variations of corporate governance premium over the Thai economic cycles. Investors can take advantage of the time-varying characteristics with the adaptation of switching investment strategy. Incorporation of style switching strategy with value premium in recessions and momentum premium in expansions improves expected returns of corporate governance-sorted portfolios.

Keywords: Corporate Governance, Markov Switching Model, Switching Investment Strategy, Value and Momentum Premiums, Thailand

Received: 26.01.2019
Accepted: 15.03.2019
Published online: 18.03.2019

JEL Classification: C30, G11, G17, G30

How to cite this paper: Kakinuma, Y. (2019). Time-varying relationship between corporate governance and expected stock returns. Risk Governance and Control: Financial Markets & Institutions, 9(1), 64-74. https://doi.org/10.22495/rgcv9i1p6