Political Regimes, Stock Liquidity, and Information Asymmetry in a Global Context
Abstract
:1. Introduction
2. Literature Review and Hypothesis Development
3. Data and Methodology
4. Regression Results
4.1. Country Governance and Liquidity
4.2. Country Governance and Information-Based Trading
4.3. First-Difference Regressions
4.4. Robustness Tests
5. Conclusions
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
Appendix A. Sequential Trade Model and Recent Improvements
Appendix A.1. Description of the Sequential Trade Model by Easley, Kiefer, O’Hara, and Paperman (EKOP)
Appendix A.2. Recent Improvements and Clustering Algorithm by Gan et al. (2015)
1 | For the year 2019, we replaced the indices with the values from 2018 due to data availability limitations. |
2 | The EKOP model assumes that buy and sell orders from uninformed traders are equally likely. |
3 | We opted against employing firm fixed-effect regression due to limited variation in country governance indices over time (only one value per country per year), which may not yield sufficient within-group variation to estimate the effects of liquidity and information asymmetry variables accurately. Instead, we used industry and year fixed-effect regressions to account for unobserved factors varying by industry and year, thus controlling for industry-specific shocks or economic environment changes affecting all firms in a given year and industry. |
4 | Year-to-year changes in variables provide a more robust test for causal relationships compared to levels because variable levels often exhibit cross-sectional correlations without direct causation. While change correlations do not imply causality, a lack of correlation in changes is likely indicative of no causal link. |
5 | To control for correlated explanatory variables, control variables are orthogonalized to the democracy index. This involves running a regression using the democracy index and an intercept for each control variable, resulting in residuals that capture all information not explained by a linear function of the democracy index. We then use these residuals in our regression model, as detailed in Harris (1994, pp. 158–59). |
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Country | Democracy | Autocracy | Polity |
---|---|---|---|
Argentina | 8.41 | 0.00 | 8.41 |
Australia | 10.00 | 0.00 | 10.00 |
Austria | 10.00 | 0.00 | 10.00 |
Belgium | 8.20 | 0.00 | 8.20 |
Brazil | 8.00 | 0.00 | 8.00 |
Canada | 10.00 | 0.00 | 10.00 |
Chile | 9.82 | 0.00 | 9.82 |
China | 0.00 | 7.00 | −7.00 |
Colombia | 7.00 | 0.00 | 7.00 |
Denmark | 10.00 | 0.00 | 10.00 |
Finland | 10.00 | 0.00 | 10.00 |
France | 10.00 | 0.00 | 10.00 |
Germany | 10.00 | 0.00 | 10.00 |
Greece | 10.00 | 0.00 | 10.00 |
Hungary | 10.00 | 0.00 | 10.00 |
India | 9.00 | 0.00 | 9.00 |
Indonesia | 8.59 | 0.00 | 8.59 |
Ireland | 10.00 | 0.00 | 10.00 |
Israel | 7.00 | 1.00 | 6.00 |
Italy | 10.00 | 0.00 | 10.00 |
Japan | 10.00 | 0.00 | 10.00 |
Korea | 8.00 | 0.00 | 8.00 |
Liberia | 7.14 | 1.00 | 6.14 |
Luxembourg | 10.00 | 0.00 | 10.00 |
Mexico | 8.00 | 0.00 | 8.00 |
Netherlands | 10.00 | 0.00 | 10.00 |
New Zealand | 10.00 | 0.00 | 10.00 |
Norway | 10.00 | 0.00 | 10.00 |
Panama | 9.00 | 0.00 | 9.00 |
Papua New Guinea | 4.63 | 0.00 | 4.63 |
Peru | 9.00 | 0.00 | 9.00 |
Philippines | 8.00 | 0.00 | 8.00 |
Portugal | 10.00 | 0.00 | 10.00 |
Russia | 5.31 | 0.69 | 4.63 |
Singapore | 1.92 | 4.00 | −2.08 |
South Africa | 9.00 | 0.00 | 9.00 |
Spain | 10.00 | 0.00 | 10.00 |
Sweden | 10.00 | 0.00 | 10.00 |
Switzerland | 10.00 | 0.00 | 10.00 |
Taiwan | 10.00 | 0.00 | 10.00 |
Thailand | 0.00 | 3.00 | −3.00 |
Turkey | 5.69 | 1.56 | 4.13 |
United Kingdom | 9.54 | 0.00 | 9.54 |
Venezuela | 5.67 | 0.00 | 5.67 |
Percentile | |||||
---|---|---|---|---|---|
Variables | Mean | Standard Deviation | 25 | 50 | 75 |
Democracy index | 8.04 | 3.47 | 8.00 | 10.00 | 10.00 |
Autocracy index | 1.05 | 2.46 | 0.00 | 0.00 | 0.00 |
Polity index | 6.98 | 5.89 | 8.00 | 10.00 | 10.00 |
GDP per capita | 31,854 | 21,417 | 9313 | 38,109 | 46,313 |
GDP growth rate | 2.35 | 3.48 | 0.60 | 1.84 | 4.01 |
Price | 26.87 | 33.48 | 6.84 | 17.18 | 36.71 |
Return volatility | 0.0478 | 0.7158 | 0.0156 | 0.0223 | 0.0332 |
Quoted spread | 0.0052 | 0.0083 | 0.0010 | 0.0022 | 0.0053 |
Effective spread | 0.0041 | 0.0073 | 0.0007 | 0.0015 | 0.0039 |
Price impact | 0.0021 | 0.0036 | 0.0005 | 0.0009 | 0.0022 |
PIN | 0.1688 | 0.0714 | 0.1181 | 0.1498 | 0.2057 |
Volume ($ in thousands) | 27,864 | 96,778 | 960 | 5779 | 24,427 |
Market Cap. ($ in millions) | 4907 | 11,997 | 198 | 816 | 3363 |
(1) | (2) | (3) | (4) | (5) | (6) | |
---|---|---|---|---|---|---|
Dependent Variable | (Quoted Spread) | (Quoted Spread) | (Quoted Spread) | (Effective Spread) | (Effective Spread) | (Effective Spread) |
DI | −0.0002 *** | −0.0001 *** | ||||
(−4.47) | (−4.24) | |||||
AI | 0.0002 *** | 0.0001 *** | ||||
(3.00) | (2.84) | |||||
PI | −0.0001 *** | −0.0001 *** | ||||
(−3.86) | (−3.64) | |||||
Log(GDP) | −0.0003 *** | −0.0004 *** | −0.0003 *** | −0.0002 *** | −0.0003 *** | −0.0003 *** |
(−4.05) | (−5.40) | (−4.69) | (−3.97) | (−5.44) | (−4.65) | |
GDP growth rate | −0.0001 ** | −0.0001 * | −0.0001 ** | −0.0000 | −0.0000 | −0.0000 |
(−2.46) | (−1.67) | (−2.21) | (−1.62) | (−0.82) | (−1.38) | |
Price | 0.0050 *** | 0.0050 *** | 0.0050 *** | 0.0051 *** | 0.0051 *** | 0.0051 *** |
(8.28) | (8.27) | (8.27) | (8.52) | (8.51) | (8.51) | |
Volatility | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 0.0000 |
(1.38) | (1.36) | (1.37) | (1.55) | (1.53) | (1.54) | |
Log(volume) | −0.0022 *** | −0.0022 *** | −0.0022 *** | −0.0019 *** | −0.0019 *** | −0.0019 *** |
(−24.58) | (−24.50) | (−24.55) | (−24.33) | (−24.23) | (−24.29) | |
Log(Mcap) | 0.0002 ** | 0.0002 ** | 0.0002 ** | 0.0002 *** | 0.0002 *** | 0.0002 *** |
(2.42) | (2.21) | (2.34) | (3.15) | (2.94) | (3.07) | |
Constant | 0.0384 *** | 0.0378 *** | 0.0381 *** | 0.0309 *** | 0.0303 *** | 0.0306 *** |
(31.30) | (31.32) | (31.43) | (28.95) | (28.64) | (28.92) | |
Industry FE | Yes | Yes | Yes | Yes | Yes | Yes |
Year FE | Yes | Yes | Yes | Yes | Yes | Yes |
Observations | 6568 | 6568 | 6568 | 6568 | 6568 | 6568 |
Adjusted R2 | 0.6414 | 0.6405 | 0.6410 | 0.6321 | 0.6314 | 0.6318 |
(4) | (5) | (6) | (7) | (8) | (9) | |
---|---|---|---|---|---|---|
Dependent Variable | (Price Impact) | (Price Impact) | (Price Impact) | (PIN) | (PIN) | (PIN) |
DI | −0.0001 *** | −0.0017 *** | ||||
(−4.12) | (−4.98) | |||||
AI | 0.0001 ** | 0.0020 *** | ||||
(2.45) | (4.34) | |||||
PI | −0.0000 *** | −0.0010 *** | ||||
(−3.40) | (−4.75) | |||||
Log(GDP) | −0.0001 *** | −0.0002 *** | −0.0002 *** | −0.0024 *** | −0.0032 *** | −0.0027 *** |
(−4.64) | (−6.04) | (−5.30) | (−3.06) | (−4.37) | (−3.60) | |
GDP growth rate | −0.0000 ** | −0.0000 | −0.0000 | −0.0001 | −0.0000 | −0.0001 |
(−1.98) | (−0.94) | (−1.62) | (−0.31) | (−0.15) | (−0.34) | |
Price | 0.0015 *** | 0.0015 *** | 0.0015 *** | −0.0006 | −0.0007 | −0.0007 |
(5.41) | (5.41) | (5.41) | (−0.35) | (−0.40) | (−0.38) | |
Volatility | 0.0000 | 0.0000 | 0.0000 | 0.0004 *** | 0.0004 *** | 0.0004 *** |
(1.20) | (1.18) | (1.19) | (5.02) | (5.02) | (5.02) | |
Log(volume) | −0.0009 *** | −0.0009 *** | −0.0009 *** | −0.0192 *** | −0.0191 *** | −0.0192 *** |
(−20.04) | (−19.96) | (−20.01) | (−30.28) | (−30.16) | (−30.24) | |
Log(Mcap) | 0.0001 ** | 0.0001 ** | 0.0001 ** | −0.0030 *** | −0.0031 *** | −0.0031 *** |
(2.55) | (2.32) | (2.46) | (−4.55) | (−4.70) | (−4.59) | |
Constant | 0.0152 *** | 0.0150 *** | 0.0151 *** | 0.5424 *** | 0.5348 *** | 0.5388 *** |
(25.48) | (24.71) | (25.25) | (56.57) | (54.75) | (56.05) | |
Industry FE | Yes | Yes | Yes | Yes | Yes | Yes |
Year FE | Yes | Yes | Yes | Yes | Yes | Yes |
Observations | 6568 | 6568 | 6568 | 6568 | 6568 | 6568 |
Adjusted R2 | 0.5153 | 0.5144 | 0.5149 | 0.5345 | 0.5341 | 0.5343 |
(1) | (2) | (3) | (4) | (5) | (6) | |
---|---|---|---|---|---|---|
Dependent Variable | (Quoted Spread) | (Quoted Spread) | (Quoted Spread) | (Effective Spread) | (Effective Spread) | (Effective Spread) |
ΔDI | −0.0003 ** | −0.0003 ** | ||||
(−2.16) | (−2.50) | |||||
ΔAI | 0.0006 *** | 0.0005 *** | ||||
(3.07) | (3.25) | |||||
ΔPI | −0.0002 ** | −0.0002 *** | ||||
(−2.49) | (−2.80) | |||||
ΔLog(GDP) | −0.0000 | −0.0000 | −0.0000 | 0.0001 | 0.0000 | 0.0001 |
(−0.03) | (−0.17) | (−0.07) | (0.28) | (0.14) | (0.25) | |
ΔGDP growth rate | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 0.0000 |
(0.59) | (0.48) | (0.55) | (1.17) | (1.04) | (1.12) | |
ΔPrice | 0.0045 *** | 0.0045 *** | 0.0045 *** | 0.0042 *** | 0.0042 *** | 0.0042 *** |
(6.36) | (6.36) | (6.36) | (5.95) | (5.96) | (5.95) | |
ΔVolatility | 0.0000 *** | 0.0000 *** | 0.0000 *** | 0.0000 *** | 0.0000 *** | 0.0000 *** |
(3.14) | (3.14) | (3.14) | (4.24) | (4.24) | (4.24) | |
ΔLog(volume) | −0.0016 *** | −0.0016 *** | −0.0016 *** | −0.0014 *** | −0.0014 *** | −0.0014 *** |
(−12.23) | (−12.22) | (−12.24) | (−10.10) | (−10.08) | (−10.10) | |
ΔLog(Mcap) | −0.0006 *** | −0.0006 *** | −0.0006 *** | −0.0004 *** | −0.0004 *** | −0.0004 *** |
(−3.14) | (−3.14) | (−3.13) | (−2.65) | (−2.66) | (−2.65) | |
Constant | 0.0000 | 0.0000 | 0.0000 | −0.0001 | −0.0001 | −0.0001 |
(0.05) | (0.06) | (0.05) | (−0.78) | (−0.77) | (−0.78) | |
Industry FE | Yes | Yes | Yes | Yes | Yes | Yes |
Year FE | Yes | Yes | Yes | Yes | Yes | Yes |
Observations | 5673 | 5673 | 5673 | 5673 | 5673 | 5673 |
Adjusted R2 | 0.3385 | 0.3386 | 0.3386 | 0.3262 | 0.3262 | 0.3263 |
(1) | (2) | (3) | (4) | (5) | (6) | |
---|---|---|---|---|---|---|
Dependent Variable | (Price Impact) | (Price Impact) | (Price Impact) | (PIN) | (PIN) | (PIN) |
ΔDI | −0.0002 *** | −0.0040 ** | ||||
(−2.85) | (−2.02) | |||||
ΔAI | 0.0004 *** | 0.0083 ** | ||||
(2.95) | (2.25) | |||||
ΔPI | −0.0002 *** | −0.0030 ** | ||||
(−2.97) | (−2.20) | |||||
ΔLog(GDP) | 0.0001 | 0.0001 | 0.0001 | 0.0001 | −0.0005 | −0.0001 |
(0.81) | (0.66) | (0.77) | (0.02) | (−0.15) | (−0.02) | |
ΔGDP growth rate | 0.0000 | 0.0000 | 0.0000 | 0.0001 | 0.0001 | 0.0001 |
(0.65) | (0.50) | (0.58) | (0.39) | (0.30) | (0.36) | |
ΔPrice | 0.0008 *** | 0.0008 *** | 0.0008 *** | 0.0044 * | 0.0044 * | 0.0044 * |
(2.66) | (2.66) | (2.66) | (1.65) | (1.66) | (1.65) | |
ΔVolatility | 0.0000 *** | 0.0000 *** | 0.0000 *** | 0.0003 ** | 0.0003 ** | 0.0003 ** |
(4.70) | (4.69) | (4.70) | (2.09) | (2.09) | (2.09) | |
ΔLog(volume) | −0.0007 *** | −0.0007 *** | −0.0007 *** | −0.0004 | −0.0004 | −0.0004 |
(−7.84) | (−7.83) | (−7.84) | (−0.20) | (−0.19) | (−0.20) | |
ΔLog(Mcap) | −0.0003 *** | −0.0003 *** | −0.0003 *** | −0.0171 *** | −0.0171 *** | −0.0171 *** |
(−3.96) | (−3.99) | (−3.96) | (−5.71) | (−5.70) | (−5.70) | |
Constant | −0.0001 | −0.0001 | −0.0001 | 0.0003 | 0.0004 | 0.0003 |
(−1.16) | (−1.13) | (−1.15) | (0.10) | (0.11) | (0.11) | |
Industry FE | Yes | Yes | Yes | Yes | Yes | Yes |
Year FE | Yes | Yes | Yes | Yes | Yes | Yes |
Observations | 5673 | 5673 | 5673 | 5673 | 5673 | 5673 |
Adjusted R2 | 0.1505 | 0.1503 | 0.1506 | 0.0351 | 0.0353 | 0.0352 |
(1) | (2) | (3) | (4) | |
---|---|---|---|---|
Dependent Variables | (Quoted Spread) | (Effective Spread) | (Price Impact) | (PIN) |
Democracy score | −0.0004 *** | −0.0003 *** | −0.0001 *** | −0.0040 *** |
(−4.54) | (−4.01) | (−3.10) | (−5.73) | |
Log(GDP) | −0.0000 | −0.0000 | −0.0001 | 0.0005 |
(−0.27) | (−0.22) | (−1.23) | (0.47) | |
GDP growth rate | −0.0001 * | −0.0000 | −0.0000 | −0.0005 * |
(−1.72) | (−0.53) | (−0.57) | (−1.70) | |
Price | 0.0048 *** | 0.0049 *** | 0.0014 *** | −0.0011 |
(7.40) | (7.57) | (4.67) | (−0.62) | |
Volatility | 0.0000 *** | 0.0000 *** | 0.0000 *** | 0.0003 *** |
(5.07) | (3.86) | (3.79) | (5.78) | |
Log(volume) | −0.0024 *** | −0.0020 *** | −0.0010 *** | −0.0204 *** |
(−23.01) | (−22.44) | (−18.42) | (−29.24) | |
Log(Mcap) | 0.0004 *** | 0.0004 *** | 0.0002 *** | −0.0017 ** |
(3.72) | (4.39) | (3.13) | (−2.26) | |
Constant | 0.0378 *** | 0.0307 *** | 0.0163 *** | 0.5313 *** |
(28.31) | (25.13) | (21.42) | (49.44) | |
Industry FE | Yes | Yes | Yes | Yes |
Year FE | Yes | Yes | Yes | Yes |
Observations | 5125 | 5125 | 5125 | 5125 |
Adjusted R2 | 0.6519 | 0.6359 | 0.5151 | 0.5663 |
(1) | (2) | (3) | (4) | |
---|---|---|---|---|
Dependent Variable | (Quoted Spread) | (Effective Spread) | (Price Impact) | (PIN) |
DI | −0.0001 *** | −0.0001 *** | −0.0001 *** | −0.0016 *** |
(−3.66) | (−3.66) | (−4.12) | (−4.70) | |
Log(GDP) | −0.0000 | −0.0001 | −0.0002 *** | −0.0019 |
(−0.36) | (−0.87) | (−2.94) | (−1.44) | |
GDP growth rate | −0.0001 * | −0.0000 | −0.0000 ** | −0.0001 |
(−1.87) | (−1.21) | (−2.12) | (−0.20) | |
Political rating | −0.0004 ** | −0.0003 | 0.0000 | −0.0008 |
(−2.27) | (−1.50) | (0.41) | (−0.39) | |
Price | 0.0051 *** | 0.0051 *** | 0.0015 *** | −0.0006 |
(8.28) | (8.51) | (5.39) | (−0.33) | |
Volatility | 0.0000 | 0.0000 | 0.0000 | 0.0004 *** |
(1.29) | (1.49) | (1.22) | (5.03) | |
Log(volume) | −0.0022 *** | −0.0019 *** | −0.0009 *** | −0.0192 *** |
(−24.62) | (−24.41) | (−20.06) | (−30.20) | |
Log(Mcap) | 0.0002 ** | 0.0002 *** | 0.0001 ** | −0.0030 *** |
(2.52) | (3.21) | (2.52) | (−4.50) | |
Constant | 0.0358 *** | 0.0294 *** | 0.0154 *** | 0.5379 *** |
(20.68) | (19.00) | (18.90) | (37.59) | |
Industry FE | Yes | Yes | Yes | Yes |
Year FE | Yes | Yes | Yes | Yes |
Observations | 6568 | 6568 | 6568 | 6568 |
Adjusted R2 | 0.6417 | 0.6322 | 0.5153 | 0.5344 |
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Kim, J.-C.; Su, Q.; Elliott, T. Political Regimes, Stock Liquidity, and Information Asymmetry in a Global Context. J. Risk Financial Manag. 2024, 17, 342. https://doi.org/10.3390/jrfm17080342
Kim J-C, Su Q, Elliott T. Political Regimes, Stock Liquidity, and Information Asymmetry in a Global Context. Journal of Risk and Financial Management. 2024; 17(8):342. https://doi.org/10.3390/jrfm17080342
Chicago/Turabian StyleKim, Jang-Chul, Qing Su, and Teressa Elliott. 2024. "Political Regimes, Stock Liquidity, and Information Asymmetry in a Global Context" Journal of Risk and Financial Management 17, no. 8: 342. https://doi.org/10.3390/jrfm17080342