Variations in emerging-market equity premia: impact of financial architecture

Raj Aggarwal and John Goodell

Journal of the Asia Pacific Economy, 2011, vol. 16, issue 3, 313-330

Abstract: This article examines a topic of much interest, the association of financial architecture and national equity premia for recent eight-year period from 15 emerging-market countries. Modeling simultaneously our estimate of the ex-ante equity premium as a dependent variable and our measure of financial architecture as an instrumental variable, we document that equity premia are larger in countries that have a more bank-oriented financial architecture, as well as greater control of corruption, more foreign access to capital, and higher spending on education. Smaller equity premia are associated with greater political stability, greater measures against self-dealing, higher market volatility and greater uncertainty avoidance. Given the importance of the ex-ante equity premium in long-term investment decisions, the anticipated demographic challenges and financial reform in most countries and recent increases in cross-border investment, there is much interest among bankers, managers and policy-makers in these results, documenting the determinants of cross-national variations in equity premia.

Date: 2011
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DOI: 10.1080/13547860.2011.589623

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