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Market Liquidity and Stock Size Premia in Emerging Financial Markets: The Implications for Foreign Investment
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posted on 2023-06-08, 11:00 authored by Bruce Hearn, Jenifer Piesse, Roger StrangeRoger StrangeEquity markets are increasingly seen as important sources of investment funds in many emerging economies, both in Africa and elsewhere. Furthermore, many countries perceive the development of such markets as a means to facilitate both foreign equity portfolio investment and foreign direct investment (FDI) through the acquisition of shareholdings in domestic companies, and thus supplement the low levels of funding from domestic savings. But many emerging stock markets exhibit substantial risk premia, which both push up the cost of equity for listed domestic firms and deter potential foreign investors. This paper estimates the cost of equity in four major African markets: South Africa, Kenya, Egypt and Morocco. These collectively represent the largest and most developed equity markets in Africa and also act as hub markets in their respective regions. London is also included as a link between the emerging and developed financial market. The Fama and French (1993) three-factor model Capital Asset Pricing Model is augmented to take account of company size and illiquidity factors that feature in African financial markets. Results show that the premia associated with size are more prevalent than with liquidity although both are highly significant in both valuation and cost of equity estimates. The evidence suggests that the lowest cost of equity is achieved between the large international market of London and the smaller but well regulated Moroccan market, while Egypt has a higher cost of equity. The small developing market of Kenya has the second highest cost of equity, although the costs associated with the main market are less than ten percent of that faced by companies in the fledgling Alternative Investment Market. South Africa has the highest cost of equity although this reflects a proliferation of smaller firms in this market.
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- Published
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- Published version
Journal
Cairo and Alexandria Stock Exchange Occasional Paper SeriesPublisher
The Egyptian Exchange (EGX)Pages
43.0Place of publication
CairoDepartment affiliated with
- Business and Management Publications
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The Egyptian ExchangeFull text available
- No
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- No
Legacy Posted Date
2012-04-24First Compliant Deposit (FCD) Date
2016-03-22Usage metrics
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