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The Impact of Investability on Asset Valuation

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  • Errunza, Vihang
  • Ta, Hai

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.

Suggested Citation

  • Errunza, Vihang & Ta, Hai, 2015. "The Impact of Investability on Asset Valuation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(5), pages 1135-1163, October.
    • Handle: RePEc:cup:jfinqa:v:50:y:2015:i:05:p:1135-1163_00
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    Cited by:

    1. Cheng, Louis T.W. & Shen, Jianfu & Wojewodzki, Michal, 2023. "A cross-country analysis of corporate carbon performance: An international investment perspective," Research in International Business and Finance, Elsevier, vol. 64(C).
    2. Park, Na Young, 2020. "Trust and trusting behavior in financial institutions: Evidence from South Korea," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 408-419.
    3. Francis, Bill B. & Hunter, Delroy M. & Kelly, Patrick J., 2020. "Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 386-411.
    4. David Hillier & Tiago Loncan, 2019. "Stock market integration, cost of equity capital, and corporate investment: Evidence from Brazil," European Financial Management, European Financial Management Association, vol. 25(1), pages 181-206, January.
    5. Liaqat Ali & Jianing Mi & Mussawar Shah & Sayed Jamal Shah & Salim khan & Kausar BiBi, 2017. "The Potential Socio-Economic Impact of China Pakistan Economic Corridor," Asian Development Policy Review, Asian Economic and Social Society, vol. 5(4), pages 191-198, December.
    6. Na Young Park, 2017. "Where Will the ‘Silver Money’ Go?," European Financial Management, European Financial Management Association, vol. 23(3), pages 459-474, June.
    7. Cai, Jun & Ho, Richard Y.K. & Zhang, Zheng, 2022. "Foreign investors, private information, and price discovery," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 506-525.

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