Does the World Bank's Ease of Doing Business Index provide valuable information to stock market investors?

Abstract

This study examines whether the World Bank’s Ease of Doing Business Index (EDBI) provides valuable information to stock market investors. Each year, the EDBI is updated in the World Bank’s annual Doing Business (DB) report, providing a ranking of business regulatory environments across worldwide economies. Under an event-study methodology, I find an insignificant stock market reaction following the annual publication of the DB report. In the long-horizon, trading strategies based on the EDBI do not yield abnormal returns. Capital flows are attracted to funds investing in economies with high DB rankings only in the first-month post-publication. There is no increase in flows for funds investing in economies with DB ranking improvements. In contrast to providing additional valuable information, evidence shows that the DB rankings are predicted by prior-period stock market returns, and ranking improvements are predicted by both prior-period stock market returns and prior-period fund flows. Overall, results of this study suggest that the DB report has limited investment value to stock market investors. Evidence shows that the information provided by the DB report are reflected in the stock market prior to its annual publication.