Testing for efficiency in the Saudi stock market: does corporate governance change matter?
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Testing for efficiency in the Saudi stock market: does corporate governance change matter? Mamdouh Abdulaziz Saleh Al‑Faryan1,2,3 · Everton Dockery1 Accepted: 30 September 2020 © The Author(s) 2020
Abstract We study the informational efficiency of the Saudi stock market (SSM), while accounting for corporate governance change, based on single, multiple, and variance ratio-based WALD tests and runs test. The main findings indicate that when the whole period is considered, the random walk hypothesis is rejected, but when divided into two sub-periods separated by the pre-corporate governance and the period marked by corporate governance change, the analysis demonstrates sub-period improvement in weak-form efficiency for the examined series. Robustness of results is verified by analysis using sector indices, which point to market efficiency. Interestingly, Hurst Exponent estimates evidence long-range dependence which suggests the predictability of stock prices and the prospect of speculative opportunities. Keywords Saudi stock market · Corporate governance · Market efficiency · Random walk · Variance ratio · Hurst exponent JEL Classification G14 · G15 · G34
1 Introduction How efficient are the world’s stock markets? This question has continued to elicit the interest of researchers ever since the work of Samuelson (1965) and the persuasive treatise of Fama (1965, 1970, 1991); see, for example, Lo and MacKinlay (1988); Poterba and Summers (1988); Shiller (1989); Urrutia (1995); Kavussanos and Dockery (2001); Al-Khazali et al. (2007); Kim and Shamsuddin (2008); Wang et al. (2009); Borges (2010); Rejichi and Aloui (2012); Sensoy (2013); Gozbasi et al. (2014); Tiwari and Kyophilavong (2014); Metghalchi et al. (2015), Anagnostidis et al. (2016), and Seetharam et al. (2017). Fama’s (1991) narrative on the categories of market efficiency has triggered a considerable amount * Mamdouh Abdulaziz Saleh Al‑Faryan Al‑[email protected] 1
Department of Economics and Finance, Faculty of Business and Law, University of Portsmouth, Richmond Building Portland Street, Portsmouth P01 3DE, UK
2
The Saudi Economic Association, Riyadh, Saudi Arabia
3
Consultant in Economics and Finance, Riyadh, Saudi Arabia
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M. A. S. Al‑Faryan, E. Dockery
of empirical research that seeks to determine whether developed and nascent capital markets reveal themselves to be specifically weak-form or semi-strong-form efficient capital markets; for a discussion, see Lim and Brooks (2011). This paper seeks to extend our understanding and build on the mentioned literature by analysing the efficiency of the Saudi stock market (SSM) and, in doing so, identify whether the changes in corporate governance following the stock market crash of 2006 improved SSM efficiency. If such changes do have some influence, it can be inferred that corporate governance mechanisms have improved the timely release of information and contributed favourably to the timeliness of price discovery and gradual improvement of the SSM’s efficiency. Prior stu
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