Bruce Allen Hearn

Equity Market Integration Versus Segmentation in Three Dominant Markets of the Southern African Customs Union: Cointegration and Causality Tests

Empirical tests of theories of financial market integration and segmentation have predominantly focused on developed OECD countries and the emerging markets of Asia Pacific. This study uses a unique panel of equity market indices from the principal Southern African Customs Union (SACU) markets. It tests the hypothesis of market integration using a cointegration approach. Markets that are found to be integrated are then tested for evidence of Granger causality through an error correction mechanism. Results obtained using VAR modelling techniques are compared to those using an ARDL model. While results lend support to existing trade, macroeconomic and developmental linkages and effects between and within the countries, there is some evidence for the presence of a regional factor common to African Emerging Markets that explains causality from Namibia to South Africa. The results support the view that institution building has progressed, which is considered to be a valuable contribution to growth promotion policies in SSA and market integration throughout financial markets in the SADC community.

Size and liquidity effects in African frontier equity markets

This study contrasts the effectiveness of the Capital Asset Pricing Model (CAPM) against more recent augmented variants including size and book-to-market factors (Fama and French, 1993), liquidity (Liu, 2006) as well as both size and liquidity factors of Martinez et al. (2005) in explaining average returns in industry portfolios across Sub Saharan Africa (SSA) excluding South Africa. This draws on a unique sample set of stocks from main board of Mauritius, local Namibian market, Botswana, Kenya, Nigeria, Ghana and Cote d’Ivoires BRVM. The evidence suggests that both size and liquidity factors are important in explaining average returns which is supported by extending the analysis using time varying coefficient Kalman filter techniques that reveal liquidity effects in all SSA markets while substantial size effects are present in Namibia and Zambia.

The law of one price: an examination of price integration between Europe and regional markets in Africa

This study examines the degree of price-integration of equity index assets between the major markets of Africa, namely Morocco, Tunisia, Egypt, Kenya, Nigeria, Namibia and South Africa with the prominent European markets of London and Paris. The application of Vector Autoregressive and Autoregressive Distributed Lag methods reveals that African markets are largely price-segmented. The only markets that are price-integrated have shared economic and financial institutions such as Namibia and South Africa, and Egypt, Tunisia and France. The evidence suggests that development policy should be focussed on enhancing existing institutions rather than embarking prematurely on regional integration

A Reassessment of Stock Market Integration in SADC: The Determinants of Liquidity and Price Discovery in Namibia

The New Economic Partnership for Africas Development (NEPAD) focuses on the benefits of integrating many smaller African markets with South Africa as the central hub, motivated by a wish to attract foreign investment and increase the liquidity. However, little attention has been paid to issues regarding the migration of liquidity and the loss of the price discovery mechanism in an integrated union where one market dominates. This article reviews this policy using the example of Namibia, which is the first market to be fully integrated with South Africa. Several established liquidity constructs are compared to determine their ability to explain the bid–ask spread plus a newly introduced measure of the proportion of daily zero returns, which captures the dynamics of the price discovery process and traders’ ability to trade on informational grounds that is found to be more appropriate in highly illiquid frontier markets, such as Namibia. Finally, there is evidence that liquidity (and illiquidity) is closely linked to the rule of law and institutional quality measures of the control of corruption, while the price-discovery process (and hence trader participation in markets) is highly sensitive to the control of corruption, political stability and regulatory quality.

The Contrasting Effects of Board Composition and Structure on IPO Firm Underpricing in a Developing Context

This study investigates the impact of board governance features and the presence of foreign, indigenous high society executives and board diversity on levels of IPO underpricing in a unique sample of 62 Initial Primary Offerings (IPOs) from across Sub Saharan African (SSA), excluding South Africa. I find evidence that greater numbers of foreign executives increase underpricing while higher numbers of indigenous high society directors have an opposing effect. Increasing board ethnic and nationality diversity together with the establishment of nominally independent board monitoring and oversight committees are associated with higher underpricing implying that standard international governance best practice is inappropriate in a developing region dominated by narrow political economies underscored by underdeveloped formal institutions with minimal investor protection

Equity Market Integration and the Implications for Foreign Investment in Africa

Africa’s securities markets have seen unprecedented change over the last fifteen years with the rapid growth and development of existing bourses and the establishment of new markets. Despite this growth, very few of these markets and listed stocks have been included in popular investment benchmark indices (such as the Standard amp; Poor’s frontier market range), demonstrating the marginalization of this region in terms of attracting much needed investment capital from worldwide flows. Historically, banking has dominated the economies of many of the countries within Africa, with stock markets only playing a sizeable and active role in financing in South Africa and Egypt. However, the role this has played in development finance has been limited by severe credit rationing from incomplete credit markets. Ironically, development is hindered not by a lack of funds within the banking sectors but rather an excess of liquidity caused by a lack of investment-grade opportunities in which banks are able to invest accumulated savings. Domestic investment is further hindered by the low savings rates in many countries, where investors prefer to invest in physical commodities or livestock in line with traditional beliefs, as well as uncertainty over the ability of savings to retain value due to macroeconomic mismanagement and instability.

The Limited Role of Small Stock Exchanges in Economic Development: A Case Study of Mozambique and Swaziland

The establishment of a successful stock market in a developing economy can provide a major source of development finance, both channelling domestic savings and attracting foreign investment. But small markets generally fail. Two micro-markets, Mozambique and Swaziland, provide an interesting case study to examine the features of new markets in sub-Saharan Africa that differ in a number of ways, including colonial legacy, membership of the Common Monetary Area and the dynamics of the political economy that defines the links between the citizens, the local elite and the state. In both countries, the operational aspects of the stock exchange are clearly inadequate as a means of promoting international investment. Thus, gains from regional integration initiatives or foreign investment are unlikely, as the markets small size and incomplete institutions currently offer limited potential for either domestic or international risk diversification. However, the political economy in both countries is the real barrier to growth.

Market liquidity and stock size premia in emerging financial markets

This paper estimates the cost of equity in South Africa, Kenya, Egypt and Morocco as well as the UK. Active investor participation in emerging markets is contingent on solid regulation and corporate governance that provide transparency in information and equity prices. Costs of equity, taking account of firm size and illiquidity, enable comparison of transactions costs between markets. The evidence suggests a clear distinction between markets with different levels of regulation and corporate governance. The UK and South Africa have the lowest cost of equity followed by Egypt and Morocco and then Kenya, where the fledgling AIMS market has the highest value.

The Impact of Firm Size and Liquidity on the Cost of External Finance in Africa

Established illiquidity measures are constructed for emerging markets in Africa and used to determine which best explain trading costs. Costs of equity are derived from an augmented CAPM for a sample of emerging financial markets generally ignored in the literature. These include: South Africa and Namibia, three countries in North Africa and four in SSA, plus London and Paris as examples of integrated markets. Minimum variance portfolios are constructed and asset weights derived, with the sample divided into countries dependent on their legal regime. Portfolio weights are shown to be directly related to well-regulated markets with high standards of corporate governance and disclosure and firms seeking cost effective finance from SSA stock markets are at a distinct disadvantage compared with those in Northern Africa, South Africa, and in particular, London and Paris.

The Governance Implications From Presence of Long-Term Foreign Investment Partner in West African IPO Firms

The attraction of blue-chip listings in emerging stock markets is a major policy initiative common across much of the developing world. However in many cases the local blue-chip entities are the result of foreign multinational enterprises (MNEs) firms engaging with local partners to form international joint ventures (IJVs) with the local IPO (initial public offerings) listing the result of the necessity to indigenize ownership as well as political pressures to boost fledgling emerging stock markets, thereby attracting investment. Using a unique hand-collected sample of 51 IPO firms from a West African region which is characterised by both an abundance of natural resources as well as considerable variation in state-level institutional quality evidence is revealed of limited protection of minority outsider property rights from the implementation of board governance mechanisms such as higher proportions of independent nonexecutives and independent committees. In the light of weak state-level institutional quality and lower levels of nonexecutives with sufficient ownership rights to effectively question decisions by executives and management the evidence suggests outsider investors are at risk from expropriation by insiders. These results underscore the importance of institutional development at state level as a mechanism of ensuring good governance at firm-level.