Corruption and equity market performance: International comparative evidence

Abstract

In this study, we explore whether, and to what extent, corruption affects price changes in Islamic and conventional equity markets. For comparison purposes, the investigation is conducted within the separate frameworks of advanced and developing countries, using the two-step system GMM estimator. After controlling for a rich set of determinants of equity price movements, we find that corruption has significant negative effects on stock returns, in both developed and developing economies. Such effects appear to be more pronounced in conventional than in Islamic markets. Furthermore, conventional and Islamic developing-country markets are much more sensitive to corruption than are their respective developed-country counterparts. Our conclusions remain valid after performing a variety of robustness checks. Policy implications are drawn from the findings.