Abstract
This paper examines the role of government financial intervention policies and cultural secrecy on equity market returns during the start of the COVID-19 pandemic in developing countries’ stock markets. We employ global data including 939 observations across 32 developing countries (23 emerging and 9 frontier stock markets) from December 1 to April 28, 2020. Our results show that the above-mentioned policies that set out to curb the COVID-19 pandemic succeed in increasing equity returns. It reflects investors’ improved perceptions of governments’ commitment to stabilizing the economy during the pandemic in developing, emerging, and frontier equity markets. Results show that investors in all equity markets discount differences in cultural secrecy in processing market information when investing in stock markets. We find that equity market investors in developing and emerging countries truly react negatively to the rise in the number of confirmed COVID-19 cases reported. Yet, we find that COVID-19 wields no influence on equity market returns in frontier equity markets. This presents frontier equity markets as a safe-haven investment destination during a global health outbreak. Our work helps investors during such events to identify the best and worst investment destinations in developing, emerging, and frontier stock markets. At the same time, it is important to understand the critical roles of: firstly, the introduced government financial intervention policies; and secondly, the daily growth in reported COVID-19 cases on stock market returns.
Highlights
Since the first detection of the coronavirus (COVID-19) in China in late 2019, the virus has become a pandemic rapidly spreading throughout the world (Goodell 2020; Ji et al 2020)
Shall investors evade investing in developing market economies where the coronavirus has rapidly spread?; or shall investors avoid investing in developing countries where governments fail to provide financial intervention policies to restore investors’ confidence?; or shall investors evade investing in developing market economies where governments have a tendency of cultural secrecy in relation to the processing market information? Is there a difference between emerging and frontier stock markets in relation to the influence of the COVID-19 disease on equity market returns when we incorporate differences in government financial intervention policies and their level of cultural secrecy? We aim to address these important questions in this empirical work
Models 1, 2, and 3 report positive and significant coefficients for the variable Government Financial Intervention (GFI), government financial intervention across developing, emerging, and frontier stock markets. This provides strong support for Hypothesis 1. These findings show that when governments intervene in their capital markets by introducing financial policies aiming to ease the effect of COVID-19, stock market investors become more assured about the overall stability of the economy
Summary
Since the first detection of the coronavirus (COVID-19) in China in late 2019, the virus has become a pandemic rapidly spreading throughout the world (Goodell 2020; Ji et al 2020). Research shows that investors prefer investing in developing countries seeking higher investment returns compared to developed equity markets (Asiedu 2002; Batten & Vo 2015). This may imply that investors could encounter a good investing opportunity by putting their money into developing countries such as China, Saudi Arabia or Mexico. These countries all share a similar secretive culture in handling information yet have interfered financially in their stock markets to change investors’ expectations
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