Legal regime, size, and liquidity factors in asset pricing

Hearn, Bruce and Piesse, Jenifer (2010) Legal regime, size, and liquidity factors in asset pricing. In Academy of International Business Annual Meeting, Rio de Janeiro, Brazil. Academy of International Business. 57 pp .

Record type: Conference or Workshop Item (Paper)

Abstract

This study introduces a new legal regime factor into the international valuation literature which exploits the differences between civil and common law origin countries. This builds directly on the concept that institutions both build and shape culture and economic outcomes and takes account of the pervasive differences between civil and common law countries worldwide La Porta et al (1998, 2002). This study contrasts the abilities of three prominent liquidity constructs, namely Amihud (2002) price-impact, Liu (2006) trading speed and volume-based turnover, in explaining the total trading costs in a sample of 62 equity markets spanning developed and developing countries as well as aggregated worldwide civil and common law universes. The evidence reveals that differences in legal origin of markets exert a pervasive effect on the liquidity generating process that transcends institutions across markets. Furthermore a world market universe is created from the constituent stocks of the top tier equity market indices from 60 countries worldwide leading to the construction of size and liquidity returns-based factors and a new legal regime factor. The results indicate that the four-factor legal regime CAPM outperform both other pricing models.

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WORLD Legal Regime BRAZIL CONFERENCE BH - Accepted Manuscript

Available under License University of Southampton Accepted Manuscript Licence.

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