William Coffie

The Application of Capital Asset Pricing Model (CAPM) to Individual Securities on Ghana Stock Exchange

Purpose – The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the Ghanaian Stock Exchange using monthly return data of 19 individual companies listed on the Exchange during the period January 2000 to December 2009. Methodology/approach – We follow a methodology similar to Jensen (1968) time series approach. Parameters are estimated using OLS. This study is designed to measure beta risk across different times by following the time series approach. The betas of the individual securities are estimated using time series data of the excess return version of the CAPM. Findings – Our test results show that although market beta contributes to the variation in equity returns in Ghana, its contribution is not as significant as predicted by the CAPM, and in some cases very weak. Our results also reject the strictest form of the Sharpe–Lintner CAPM, but we found positive linear relationship between equity risk premium and market beta. Instead, our evidence uphold the Jensen (1968) and Jensen, Black, and Scholes (1972) versions of the CAPM. Research limitations/implications – This study is limited to the single-factor CAPM. Future studies will extend the test to include both size and BE/ME fundamentals and factors relating to P/E ratio, momentum and liquidity. Practical implications – Our results will make corporate managers to be cautious when using CAPM as a basis to determine cost of equity for investment appraisal purposes, and fund managers when evaluating asset and portfolio performance. Originality/value – The CAPM is applied to individual securities instead of portfolios, since the model was developed using information on a single security.

Measuring volatility persistence and risk in Southern and East African stock markets

This paper investigates volatility persistence in Southern and East African stock markets taking into account the rate of volatility decay. Generalised autoregressive conditional heteroscedaticity (GARCH) and GARCH-in-mean (GARCH-M) models are used to estimate volatility persistence and risk premium for these markets. The results presented here suggest that there is volatility persistence in emerging Southern and East African stock markets. Further empirical estimates show that rate of volatility decay varies considerably among the markets, for example, volatility in Mauritius diminishes to half of its original size within seven hours, while it takes almost eight months for volatility in Zambia to taper off to half of its original size. The study concludes that volatility risk exists in emerging Southern and East African stock markets and investors would require compensation for bearing this type of risk. The results here have important implications for portfolio allocation, asset pricing and risk management.

Corporate social responsibility disclosures (CSRD), corporate governance and the degree of multinational activities: Evidence from a developing economy

The purpose of this paper is to examine the effect of corporate governance and degree of multinational activities (DMAs) on corporate social responsibility disclosures (CSRD) within the context of a developing country.,Using the annual report of 33 listed firms spanning from 2008 to 2013, the authors employed content analysis based on an adapted index score of CSRD developed by Hackston and Milne (1996) as applied in similar studies (e.g. Deegan et al., 2002; Hassan, 2014). Guided by the authors’ hypotheses, the authors model quantity and quality of CSRD (two separate econometric models) as functions of multinational activity and corporate governance.,The results show that the DMA has a positive association with both quality and quality of CSRD. The results also show that certain corporate governance characteristics such as board size (quality and quantity) as well as the presence of a social responsibility sub-committee of the board (quality) have a positive relationship with CSRD. However, increasing the number of non-executive directors (NEDs) may not necessarily improve the quantity or quality of disclosure.,The study is limited by theory and geography. Theoretically, the study is based on the legitimacy theory and feels compelled to reiterate the importance of considering alternative theoretical perspective in future research. Again the study is limited geographically as the investigation is based on Ghana only and the authors suggest that future research be extended to other countries.,This study is important as it demonstrates the importance of providing quality of CSRD to stakeholders when the board of a firm has a sub-committee responsible for corporate social responsibility.,The results of the study extend the literature on CSRD by demonstrating a new evidence on how the degree of firm’s multinational activities together with corporate government mechanism affects both quantity and quality of CSRD in the context of unchartered developing country. The results support the theoretical view that companies engage in CSRD in attempt to legitimize their operations based on the pressure exerted on them and the mechanism put in place to respond to those pressures.

Modelling stock return volatility: comparative evidence from selected emerging African and Western developed markets

This paper investigates volatility persistence by comparing evidence from selected emerging African and Western developed markets, taking into account the rate of volatility decay. Generalised Autoregressive Conditional Heteroscedasticity (GARCH) and GARCH-in-mean (GARCH-M) models are used to estimate volatility persistence and risk premium for these markets. The results presented here suggest that there is volatility persistence in the four emerging African markets and the five developed markets. The study concludes that volatility risk exists in these markets and investors would require compensation for bearing this type of risk.

Multifactor explanation of security returns in South Africa

This paper evaluates the performance of the Fama and French three-factor model in South Africa for individual securities. We employed a multivariate time series methodology similar to Fama and French. The empirical results contradict the theoretical proposition of the Fama-French model and are inconsistent with the results documented by most studies in the developed and some emerging markets. The size and value premia are very weak when included in the regression model. Furthermore, the Fama and French three-factor model is unable to explain the return-generating process of securities trading on the Johannesburg Stock Exchange. This has important implication for corporate managers, investors as well as fund and portfolio managers in terms of estimating cost of equity, rate of return and portfolio allocation.

Significance of beta in estimating cost of capital in an emerging economy: the Nigerian evidence

The importance of correctly estimating the appropriate discount factor to use in corporate valuation situations such IPOs, mergers and acquisitions, leverage buyouts, capital budgeting decisions, etc. is well understood in the finance literature. A key input in this estimation, and yet the most difficult to calculate correctly, which can induce error in the estimate of the discount factor or cost of capital obtained, is the cost of equity capital. The Capital Assets Pricing Model (CAPM) of Sharpe (1965) and Lintner (1966) provides the most established theoretical basis of estimating the cost of capital. This paper investigates whether the CAPM is a sufficiently valid asset pricing model to use in estimating the cost of equity capital in Nigeria. Jensen (1968) time series methodology is followed in the study. Our results show that the CAPM significantly explains equity returns on the Nigeria market however, there are other risk factors not captured by beta (i.e. systematic risk measure per CAPM definition).

Analysing security performance in Morocco and South Africa using CAPM

This paper examines how well the capital asset pricing model (CAPM) is able to describe the performance of individual securities listed on Casablanca and Johannesburg Stock Exchanges, Morocco and South Africa respectively. Jensen (1968) methodology is employed in the study. While there is a reasonable amount of empirical studies on the performance of the CAPM in Africa, the validity of the model has not previously been addressed in this manner in Morocco and South Africa. The CAPM posits that the performance of assets is solely explained by the market beta. The results of this study do not support this assertion. Although it was found that beta contributes to the variation of security returns in Morocco and South Africa, that contribution is insufficient to fully explain security performance. Instead, we found positive and significant alpha values, representing factors unexplained by market beta, and hence deviations from the CAPM.