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Does deterioration in rule of law per se create or destroy value?

Author

Listed:
  • Byrka-Kita Katarzyna

    (Institute of Economics and Finance, University of Szczecin, Szczecin, Poland)

  • Czerwiński Mateusz

    (Institute of Economics and Finance, University of Szczecin, Szczecin, Poland)

  • Bajerska Aurelia

    (Doctoral School of the University of Szczecin, Institute of Economics and Finance, University of Szczecin, Szczecin, Poland)

Abstract

We investigate the link between the rule of law and equity returns in post-transitional economies over the period January 2010–December 2020 by using panel data regressions. By applying several rule-of-law proxies for national legal frameworks and justice system quality as proxies for the rule-of-law principle, the data sets from the capital markets of Poland, Latvia, Lithuania, and Estonia showed that country-level judicial system quality is an important driver of company market performance, and that post-transitional countries with lower rule-of-law measures exhibit higher returns on equity than those with better measures. Our results support the idea that since poor governance and country instability increase agency and transaction costs, in addition to decreasing growth prospects and profitable projects available to companies, the risk premium demanded by investors increases, leading to higher equity returns.

Suggested Citation

  • Byrka-Kita Katarzyna & Czerwiński Mateusz & Bajerska Aurelia, 2023. "Does deterioration in rule of law per se create or destroy value?," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 59(4), pages 277-296, December.
    • Handle: RePEc:vrs:ijomae:v:59:y:2023:i:4:p:277-296:n:6
    DOI: 10.2478/ijme-2023-0016
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    More about this item

    Keywords

    capital markets; country governance; equity returns; rule of law;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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