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International variations in expected equity premia: Role of financial architecture and governance

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  • Aggarwal, Raj
  • Goodell, John W.

Abstract

Estimates of ex-ante equity premia are important in planning investments in pension funds, life insurance pools, and for other long-term financial obligations or goals. However, while global cross-border investment positions and flows have been rising, there is little research on non-US ex-ante equity premia or on their determinants in a global setting. This paper uses data on a recent 8-year period from 33 countries and models 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 ex-ante equity premia are larger in countries that have a more bank-oriented financial architecture, are wealthier, and have better governance. These results are robust to alternative model specifications and estimation techniques. Given the importance of equity premia and financial architecture, these results should be of much interest to scholars, managers, regulators, and policy makers.

Suggested Citation

  • Aggarwal, Raj & Goodell, John W., 2011. "International variations in expected equity premia: Role of financial architecture and governance," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3090-3100, November.
  • Handle: RePEc:eee:jbfina:v:35:y:2011:i:11:p:3090-3100
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    References listed on IDEAS

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    Cited by:

    1. Donadelli, Michael & Persha, Lauren, 2014. "Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty," Research in International Business and Finance, Elsevier, vol. 30(C), pages 284-309.
    2. Aggarwal, Raj & Goodell, John W. & Selleck, Lauren J., 2015. "Lending to women in microfinance: Role of social trust," International Business Review, Elsevier, vol. 24(1), pages 55-65.
    3. Aggarwal, Raj & Goodell, John W., 2014. "Cross-national differences in access to finance: Influence of culture and institutional environments," Research in International Business and Finance, Elsevier, vol. 31(C), pages 193-211.
    4. Alves, Paulo & Couto, Eduardo Barbosa & Francisco, Paulo Morais, 2015. "Board of directors’ composition and capital structure," Research in International Business and Finance, Elsevier, vol. 35(C), pages 1-32.
    5. Chui, Andy C.W. & Kwok, Chuck C.Y. & (Stephen) Zhou, Gaoguang, 2016. "National culture and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 1-19.

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