Journal of Commerce and Accounting Research

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

A Three-Factor Model and Excess Return in an Emerging Market:A Case Study of Listed Companies on Tehran Stock Exchange (TSE)


Affiliations
1 Department of Management and Accounting, Islamic Azad University, Science and Research Branch, Tehran-Mazandaran, Iran, Islamic Republic of
2 Department of Management and Accounting, Islamic Azad University, ghaemshahr Branch, Iran, Islamic Republic of
     

   Subscribe/Renew Journal


The primary function of an efficient and deep capital market is to provide a context for supply of highquality and transparent information and to create reasonable liquidity by eliminating information asymmetry, minimising transaction costs, and speeding up transactions. In this research, a three-factor model is proposed based on which the effect (the explanatory power) of three variables market risk (beta), disclosed accounting information quality, and stock liquidity on stock return is investigated. Using time series method, the financial information of 72 TSE-listed companies over a 7-year period (2007-2013) was examined. The stock excess return was found to be significantly associated with market excess return, stock liquidity and accounting information quality. The results, in addition, indicated higher explanatory power of the 3-factor model (beta, information quality, and liquidity) relative to the CAPM single-factor model and the 2-factor model (considering beta and liquidity) in predicting the excess return on TSE.

Keywords

Information Quality, Liquidity, Beta, Information Asymmetry.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Abzari, M., Kabiripour, V., & Soheili, C. (2013). Analysis of the effect of liquidity on stock return with controlling of investment styles. Journal of Accounting Knowledge, 15, 79-103.

  • Acharya, V. V., & Pedersen, L. H. (2005). Asset pricing with liquidity risk. Journal of Financial Economics, 77, 375-410.

  • Amihud, Y. (2002). Illiquidity and stock returns: Crosssection and time-series effects. Journal of Financial Markets, 2(5), 31-56.

  • Amihud, Y., & Mendelson, H. (1986). Asset pricing and bidask spread. Journal of Financial Economics, 17(2).

  • Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3-18.

  • Barth, M. E., Konchitchki, Y., & Landsman, W. R. (2013). Cost of capital and earnings transparency. Journal of Accounting and Economics, 55, 206-224.

  • Black, F., Jensen, M., & Scholes, M. (1972). The capital asset pricing model: Some empirical tests. In M.C. Jensen (ed.), Studies in the Theory of Capital Markets. Praeger: New York, pp. 79-124.

  • Bortolotti, B., De Jong, F., Nicodano, G., & Ibolya, S. (2006). Privatization and stock market liquidity. Journal of Banking and Finance. Social Science Electronic Publishing.

  • Brennan, M. J., & Subrahmanyam, A. (1996). Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics, 41, 441-464.

  • Datar, V. T., Naik, N. Y., & Radcliffe, R. (1998). Liquidity and stock returns: an alternative test. Journal of Financial Markets, 1, 205-219.

  • Dechow, P., & Dichev, I. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77, 35-59.

  • Deuskar, P. (2006). AFA 2007 Chicago Meetings Paper.

  • Eslami-Bidgoli, G. R., & Sarandj, A. (2008). Choice of portfolio using three measures of mean return, return standard deviation, and liquidity on Tehran stock exchange. Accounting and Auditing Studies, 15(53), 3-16.

  • Fama, E. F., & French, K. R. (2004). The capital asset pricing model: Theory and evidence. The Journal of Economic Perspectives, 18(3), 25-46.

  • Fama, E. F., & MacBeth, J. D. (1973). Risk, return and equilibrium: Empirical tests. The Journal of Political Economy, 81(3), 607-636.

  • Foroughi, D., & Ghajavand, S. (2011). The effect of information quality on stock liquidity in the listed companies on tehran stock exchange.

  • Francis, J., LaFond, R., Olsson, P. M., & Schipper, K. (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39, 295-327

  • GhalibafAsl, H., & Eghbali, E. (2013). Liquidity premium and two-factor model (Market and Liquidity) on Tehran stock exchange. Quantitative Studies in Management, 4.

  • Hasbrouck, J., & Seppi, D. J. (2001). Common factors in prices, order flows and liquidity. Journal of Financial Economics, 59, 383-411.

  • Haghighat, H., Nemati, R., & Alavi, M. (2014). Information transparency and stock liquidity. Empirical Accounting Researches, 12, 85-98.

  • Hussainey, K., & Mouselli, S. (2010). Disclosure quality and stock returns in the UK. Journal of Applied Accounting Research, 11, 154-174.

  • Hashemi, S. A., Ghajavand, Z., & Ghajavand, S. (2013). The effect of various levels of liquidity measures on stock return premium using the Fama and French four-factor model. Quarterly Journal of Asset Management and Financing, 2, 69-86.

  • Jacoby, G., Fowler, D. J., & Gottesman, A. A. (2000). The capital asset pricing model and the liquidity effect: A theoretical approach. Financial Markets, 3(3), 69-81.

  • Jeffrey, N. (2011). The effect of information quality on liquidity risk. Journal of Accounting and Economics, 165, 1-18.

  • Kaniel, R., Ozoguz, A., & Starks, L. (2012). The high volume return premium: Cross-country evidence. Journal of Financial Economics, 103(2), 255-279.

  • Khajavi, S., & Momtazian, A. (2013). The effect of financial information disclosure quality on stock current and future return. Journal of Financial Accounting Knowledge, 1.

  • Lam, S. K., & Tam, L. H. (2011). Liquidity and asset pricing: Evidence from the Hong Kong stock market. Journal of Banking and Finance, 35(9), 2217-2230

  • Lambert, R., Leuz, C., & Verrechia, R. E. (2006). Accounting information, disclosure and cost of capital.

  • Lang, M., & Maffett, M., (2011). Transparency and liquidity uncertainty in crisis period: International evidence, Unpublished Working Paper, University of North Carolina at Chapel Hill.

  • Lee Gemma, M. R. (2008). Seasend equity offerings, quality of accounting information and expected flotation costs. Journal of Financial Economics.

  • Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 47(1), 13-37.

  • Lischewski, J., & Voronkova, S. (2012). Size, value and liquidity: Do they really matter on an emerging stock market. Emerging Markets Review, 13(1), 8-25.

  • Liu, W. (2006). Liquidity premium and a two-factor model. Journal of Financial Economics, 82(3), 631-671.

  • Lyle, M. R. (2014). How does information quality affect option and stock returns?. Northwestern University.

  • Marshall, B. R. (2006). Liquidity and stock returns: Evidence from a pure order-driven market using a new liquidity proxy. International Review of Financial Analysis, 5(15), 21-38.

  • Marshal, B. R., & Young, M. (2003). Liquidity and stock returns in pure order-driven markets: Evidence from Australian stock market. International Review of Financial Analysis, 12 Explorative Expectations: Implications for Volatility and Liquidity.

  • Marshall, B., & Young, M. (2006). Liquidity and stock returns in pureorder-driven markets: Evidence from the Australian stock market. International Review of Financial Analysis, 12.

  • Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.

  • Martinez, M. A., Nieto, B., Rubio, R., & Tapia, M. (2005). Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market. International Review of Economics and Finance, 14, 81-103.


Abstract Views: 385

PDF Views: 0




  • A Three-Factor Model and Excess Return in an Emerging Market:A Case Study of Listed Companies on Tehran Stock Exchange (TSE)

Abstract Views: 385  |  PDF Views: 0

Authors

Morteza Hashemi
Department of Management and Accounting, Islamic Azad University, Science and Research Branch, Tehran-Mazandaran, Iran, Islamic Republic of
Abbasali Pouraghajan
Department of Management and Accounting, Islamic Azad University, ghaemshahr Branch, Iran, Islamic Republic of

Abstract


The primary function of an efficient and deep capital market is to provide a context for supply of highquality and transparent information and to create reasonable liquidity by eliminating information asymmetry, minimising transaction costs, and speeding up transactions. In this research, a three-factor model is proposed based on which the effect (the explanatory power) of three variables market risk (beta), disclosed accounting information quality, and stock liquidity on stock return is investigated. Using time series method, the financial information of 72 TSE-listed companies over a 7-year period (2007-2013) was examined. The stock excess return was found to be significantly associated with market excess return, stock liquidity and accounting information quality. The results, in addition, indicated higher explanatory power of the 3-factor model (beta, information quality, and liquidity) relative to the CAPM single-factor model and the 2-factor model (considering beta and liquidity) in predicting the excess return on TSE.

Keywords


Information Quality, Liquidity, Beta, Information Asymmetry.

References