Governance Quality and Capital Markets Efficiency in Southeast Europe

This article explores the importance of qualitative factors in determining cross-country Southeast European (SEE) capital markets efficiency in period between 2005 and 2023. The study employs the Correlated Random Effects (CRE) model as the most appropriate specification. It ensures methodological rigor by addressing correlation between unobserved heterogeneity and explanatory variables, thereby combining the efficiency of random effects (RE) with the consistency of fixed effects (FE) estimation. In precedent quantitative review the selected frontier capital markets were found to be weak-form inefficient under the Eugen Fama hypothesis. This work broadens the study to grasp precedent recommendation to integrate conduciveness to qualitative factors in the likes of rule of law, control of corruption, regulatory quality, and government effectiveness. Specifically empirical statistical testing reveals that governance quality positively impacts market values. The results infer association with capital markets’ role with more vigour under the perception of the proven weak-form inefficiency.