Integration among Major Capital Markets in the World: An Investigation Focusing on Firm Value

This study examines the degree of capital market integration among major stock markets in the world. Unlike prior studies that focus on stock returns, this study focus on firm values in investigating the degree of capital market integration. Specifically, I use firm value measures-such as price/cash flow, price/earnings and price/book-for a sample of large-cap firms from seven major industrial countries over the 1998~2002 period in order to examine the relative importance of country, industry, year and firm effects in explaining the variance of firm value. Our variance components analysis reveals that the extent to which firm values tend to differ across countries is not small. Specifically, in some model specification, the extent to which firm values vary across countries explains as much as over 15 percent of the total firm value variation. However this observation does not necessarily imply that the degree of integration of world capital markets is low, because business fundamentals tend to differ across countries to a similar or greater extent. Our results suggest that world capital markets are integrated in the sense that the firm-value difference across countries is not greater than the business fundamentals difference across countries.