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.
Highlights
This study analyzes a time-varying relationship between corporate governance and expected stock returns
This paper aims to analyze a time-varying relationship between corporate governance and expected stock returns in Thailand
The results indicate the presence of asymmetries in the variations of corporate governance premium over the Thai economic cycles
Summary
This study analyzes a time-varying relationship between corporate governance and expected stock returns. Time-varying returns are captured by Markov switching model, which the previous researches suggest its capability of fitting well-documented risk premiums such as size, value, and momentum. Are result of variations in economic conditions (Perez-Quiros & Timmermann, 2000; Ammann & Verhofen, 2006; Black & McMillan, 2005; Ozoguz, 2008; Gulen et al, 2011; Kim et al, 2014; Sarwar et al, 2017) What their studies have in common is that the three risk premiums are time-varying, and the stock returns’ sensitivity to the macroeconomic variables depends on economic states or regimes which are identified by Markov switching model. It boasts of the highest average daily turnover in the region, representing high liquidity in the market, which is one of the key market developments for both domestic and foreign investors
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