Corporate Governance and Conditional Skewness in the World’s Stock Markets*

Abstract

We investigate why stock returns in emerging markets tend to be more positively skewed than those in developed markets. We argue that differences in the quality of corporate governance matter to return skewness. Using return data from more than fourteen thousand individual stocks in 38 countries, we find that positive skewness is most profound in stocks from markets that have poor corporate governance. Our results are robust to a variety of model specifications, different measures of return asymmetries, and alternative measures of corporate governance. Finally, analogous results are also obtained from aggregate stock market returns.