Determinants of cross-sectional stock return variations in emerging markets

We extend the studies of the country and industry components of stock returns by exploring fundamental sources of these components. Country and industry effects are generated using company data for 1984-2004 from 13 emerging markets and 11 industries and then regressed on country and firm characteristics to identify their determinants. Macroeconomic variables, financial sector development, and the legal environment all have a significant influence on country effects; industrial and geographical concentration help explain industry effects post-1997. We find that different legal origins matter for the country component of stock returns and suggest that further research on this is needed. The evidence also suggests that globalization alone does not drive stock markets and that country factors will continue to be an important determinant of stock returns.