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Downside systematic risk in Pakistani stock market: role of corporate governance, financial liberalization and investor sentiment

Shahzad Hussain (Faculty of Management Sciences, Foundation University Islamabad, Islamabad, Pakistan)
Muhammad Akbar (Birmingham City University, Birmingham, UK)
Qaisar Ali Malik (Faculty of Management Sciences, Foundation University Islamabad, Islamabad, Pakistan)
Tanveer Ahmad (Kohat University of Science and Technology, Kohat, Pakistan)
Nasir Abbas (Department of Business Management, University of Baltistan, Baltistan, Pakistan)

Journal of Asia Business Studies

ISSN: 1558-7894

Article publication date: 12 July 2021

Issue publication date: 21 February 2022

320

Abstract

Purpose

The purpose of this paper is to examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models.

Design/methodology/approach

The evidence is based on a sample of 230 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2008–2018. Furthermore, this study analyzes the data through Blundell and Bond (1998) technique in the full sample as well sub-samples (big and small firms).

Findings

The authors document that corporate governance mechanism reduces the downside risk, whereas investor sentiment and financial liberalization increase the investors’ exposure toward downside risk. Particularly, the results provide some new insights that the socio-political turbulence as a moderator weakens the impact of corporate governance and strengthens the effect of investor sentiment and financial liberalization on downside risk. Consistent with prior studies, the analysis of sub-samples reveals some statistical variations in large and small-size sampled firms. Theoretically, the findings mainly support agency theory, noise trader theory and the Keynesians hypothesis.

Originality/value

Stock market volatility has become a prime area of concern for investors, policymakers and regulators in emerging economies. Primarily, the existence of market volatility is attributed to weak governance, irrational behavior of market participants, the liberation of financial policies and sociopolitical turbulence. Therefore, the present study provides simultaneous empirical evidence to determine whether corporate governance, investor sentiment and financial liberalization hinder or spur downside risk in an emerging economy. Furthermore, the work relates to a small number of studies that examine the role of socio-political turbulence as a moderator on the relationship of corporate governance, investor sentiment and financial liberalization with downside systematic risk.

Keywords

Acknowledgements

Authors are extremely grateful to the anonymous reviewers and editor for their worthy suggestion.

Citation

Hussain, S., Akbar, M., Malik, Q.A., Ahmad, T. and Abbas, N. (2022), "Downside systematic risk in Pakistani stock market: role of corporate governance, financial liberalization and investor sentiment", Journal of Asia Business Studies, Vol. 16 No. 1, pp. 137-160. https://doi.org/10.1108/JABS-09-2020-0356

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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