Size and liquidity effects in Australasian and South East Asian equity markets

Abstract

The emerging equity markets of Asia-Pacific region and the developed Australian and New Zealand equity markets play a significant role in attracting foreign direct investment (FDI) and portfolio investment as well as facilitating local economic development and enforcing high standards of governance. The markets within the region are extremely diverse in nature ranging from those that are heavily influenced and controlled by the state to those that have strong corporate governance regimes enforced by stringent well designed regulation. This paper estimates the costs of equity across major industry sectors in the equity markets of Australia, New Zealand, Indonesia, Malaysia, Singapore, Thailand, Hong Kong and China’s Shenzen and Shanghai. The Fama and French (1993) three-factor model Capital Asset Pricing Model is augmented to take account of stock size and illiquidity factors that are prominent in emerging markets. Results show that premia associated with liquidity are important for the majority of Asia-Pacific markets although in striking contrast size premia are overwhelmingly important in the two Chinese exchanges of Shenzen and Shanghai reflecting the unique level of state control exerted over these markets. Costs of equity are found to be lowest in Australia and New Zealand and considerably higher in Indonesia and Thailand where regulation concerning information disclosure and corporate governance are weaker. However the costs of equity associated across all industries for the two Chinese exchanges of Shenzen and Shanghai are the highest owing primarily to a considerable size premium driving returns and arising from state restrictions placed on listed firms and investors alike. This would provide evidence that burdensome state control exerted on markets leads to a burden of costs falling on firms seeking a listing and rendering these markets less competitive than regional neighbours.

More information

Identifiers

ORCID for Bruce Hearn: orcid.org/0000-0001-9767-0198

Catalogue record

Export record