Nations have broadly varying cultures of equity financing. This dissertation examines both cross-national differences in the price of equity risk and cross-national differences in preference for equity financing, with a view toward how social factors such as trust, in the sense of actual and perceived contract reliability, affects nations’ cultures of equity.
As a planning measure for long-term investments, the equity premium is an important estimate. Nevertheless, there is little agreement on the empirical estimates of the equity premium in various countries or on the methods most appropriate for estimating the equity premium. Using improved and consistent methodologies, for the first time this dissertation provides equity premium estimates using two different estimation procedures for wide sample of countries covering a recent eight-year period. While Residual Income Growth (RIV) and Abnormal Earnings Growth (AEG) estimates follow similar trends though time, it is found that AEG estimates are consistently lower and less variable.
Next, unlike prior studies, this dissertation assesses national characteristics as determinants of cross-border differences in equity premia. It is found that country equity premia narrow with greater concentration of equity ownership and greater economic inequality. Country equity premia widen with more uncertainty avoidance as well as more stock and bond market development, and better legal protection and regulatory quality. Results point to non-pecuniary benefits to holding equity or to controlling ownerships having preferential access to capital.
Further, there is little research on the degree to which nations’ reliance on markets versus institutions is determined by cultural, legal, and other national characteristics. This dissertation documents that national preference for market financing is associated with increased private monitoring of banks, market openness, and market concentration. Less national preference for market financing is associated with measures reflecting greater anti-self dealing laws, more ambiguity aversion and greater official supervision of banking.
Overall, this dissertation makes important new contributions to a better understanding of the nature and role of equity financing in wide range of countries. Given the importance of returns on long range corporate equity investments and corporate equity as a source of investments, these contributions should be of much interest to scholars, managers, and policymakers.