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The Impact of Investability on Asset Valuation

Published online by Cambridge University Press:  09 December 2015

Vihang Errunza  and
Hai Ta
Vihang Errunza*
Affiliation:
vihang.errunza@mcgill.ca, McGill University, Desautels Faculty of Management, Montreal PQ H3A 1G5, Canada
Hai Ta
Affiliation:
h.ta@uwinnipeg.ca, University of Winnipeg, Faculty of Business Administration and Economics, Winnipeg MB R3B 2E9, Canada.
*
*Corresponding author: vihang.errunza@mcgill.ca
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Abstract

We develop an international asset pricing model to measure the impact of investability constraints on asset pricing. For a sample of 18 emerging markets, we use Standard & Poor’s investable weight factor (IWF) to show a 26.33% reduction in the cost of equity capital when non-investable firms become partially investable, with a further 12.51% reduction when partially investable firms become unrestricted. We demonstrate the generality and usefulness of the IWF by examining stocks with global/American depositary receipts and foreign institutional holdings as alternate investability proxies. Our results provide strong evidence of the economic benefits of market liberalization policies.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 5 , October 2015 , pp. 1135 - 1163
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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