Can governance quality predict stock market returns? New global evidence

•We test whether governance predicts stock returns for 38 countries.•A time-series governance index is created.•We find that for 10 of these countries stock returns are predictable.•A mean-variance investor is able to make statistically significant profits in predictable stock markets.

We develop country-level governance indices using governance risk factors and examine whether country-level governance can predict stock market returns. We find that country-level governance predicts stock market returns only in countries where governance quality is poor. For countries with well-developed governance, there is no evidence that governance predicts returns. Our findings also confirm that investors in countries with weak governance can utilise information contained in country-level governance indicators to devise profitable portfolio strategies.