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Download Date 30/09/2021 09:11:11 Index revisions, market quality and the cost of equity capital. Item Type Thesis Authors Aldaya, Wael H. Rights <a rel="license" href="http://creativecommons.org/licenses/ by-nc-nd/3.0/"><img alt="Creative Commons License" style="border-width:0" src="http://i.creativecommons.org/l/by- nc-nd/3.0/88x31.png" /></a><br />The University of Bradford theses are licenced under a <a rel="license" href="http:// creativecommons.org/licenses/by-nc-nd/3.0/">Creative Commons Licence</a>. Download date 30/09/2021 09:11:11 Link to Item http://hdl.handle.net/10454/5687 University of Bradford eThesis This thesis is hosted in Bradford Scholars – The University of Bradford Open Access repository. Visit the repository for full metadata or to contact the repository team © University of Bradford. This work is licenced for reuse under a Creative Commons Licence. Index revisions, market quality and the cost of equity capital Wael Hamdi Aldaya Submitted for the degree of Doctor of Philosophy School of Management University of Bradford 2012 i ABSTRACT Wael Hamdi AlDAYA Index revisions, market quality and the cost of equity capital Keywords: Index revisions, stock liquidity, cost of capital, market quality, price efficiency. This thesis examines the impact of FTSE 100 index revisions on the various aspects of stock market quality and the cost of equity capital. Our study spans over the period 1986–2009. Our analyses indicate that the index membership enhances all aspects of liquidity, including trading continuity, trading cost and price impact. We also show that the liquidity premium and the cost of equity capital decrease significantly after additions, but do not exhibit any significant change following deletions. The finding that investment opportunities increases after additions, but do not decline following deletions suggests that the benefits of joining an index are likely to be permanent. This evidence is consistent with the investor awareness hypothesis view of Chen et al. (2004, 2006), which suggests that investors’ awareness improve when a stock becomes a member of an index, but do not diminish after it is removal from the index. Finally, we report significant changes in the comovement of stock returns with the FTSE 100 index around the revision events. These changes are driven mainly by noise-related factors and partly by fundamental- related factors. ii Declaration No portion of the work referred to in the thesis has been submitted in support of an application for another degree or qualification of this or any other university or other institution of learning. iii Publications Published article DAYA, W., MAZOUZ, K. & FREEMAN, M. 2012. Information efficiency changes following FTSE 100 index revisions. Journal of International Financial Markets, Institutions and Money Pending publications 1. The cost of equity capital changes following FTSE 100 index revisions. 2. Stock return comovement changes following FTSE 100 index revisions. iv Acknowledgement I would like to thank my supervisors Professor Khelifa Mazouz and Professor Mark Freeman for their support and guidance, my good friend Dr Jamal Alattar and my sponsors: International Fellows Program, USA, (IFP) and American-Mideast-Educational and Training Services, Inc (AMIDEAST). v Dedication This thesis is dedicated to: my parents " for their endless love, support, and encouragement; my wife Zainab "her loving support and boundless patience made all of this possible"; my brother Yousef and best friends Saleh Althunaian and Salah Alawadhi " your friendship makes my life a wonderful experience ". أهدي هذه اﻻطروحة إلى أمي وأبي "لحبهم وتشجيعهم ودعمهم الذي ﻻ نهاية له" إلى زوجتي زينب "لحبها وصبرها الذي ﻻ حدود له والذي جعل ذلك ممكنا" إلى أخي يوسف وأصدقائي صالح الثنيان وصﻻح العوضي "لدعمهم وتجربتي الفريدة معهم". vi Table of Contents ABSTRACT ..................................................................................................................................ii Declaration ............................................................................................................................... iii Publications .............................................................................................................................. iv Acknowledgement .................................................................................................................... v Dedication ................................................................................................................................ vi List of Tables ............................................................................................................................. x Glossary .................................................................................................................................... xi Chapter 1: Introduction ........................................................................................................... 1 1.1. Rationale of thesis .................................................................................................... 1 1.2. Contributions and findings ............................................................................................ 4 1.2.1. Index revision, stock liquidity and the cost of equity capital ................................. 5 1.2.2. Index revision and stock return comovement ........................................................ 8 1.2.3. Index revision and stock market quality .............................................................. 12 1.3. Structures of the thesis ............................................................................................... 14 Chapter 2: Price formation and aspects of liquidity .............................................................. 16 2.1. Introduction ................................................................................................................ 16 2.2. Price formation models ............................................................................................... 17 2.2.1. The inventory-based models ............................................................................... 17 2.2.2. Information-based models ................................................................................... 20 2.2.3 Empirical evidence ................................................................................................ 25 2.3 Liquidity definitions and dimensions ........................................................................... 27 2.3.1 One-dimensional liquidity measures .................................................................... 30 2.3.2 Multi-dimensional liquidity measures .................................................................. 34 2.3.3 Comparisons studies ............................................................................................. 46 2.4 Stock market quality .................................................................................................... 47 2.4.1 Market quality measures ...................................................................................... 48 2.4.2 Empirical studies on market quality ...................................................................... 55 2.5 Liquidity risk and asset pricing ..................................................................................... 62 2.5.1 Liquidity and asset pricing one-dimensional-based models ................................. 62 2.5.2 Liquidity and asset pricing multi-dimensional- based models .............................. 64 2.6 Summary and Conclusion ............................................................................................ 72 Chapter 3: The index revision literature ................................................................................ 74 vii 3.1 Introduction ................................................................................................................. 74 3.2 Index revisions hypotheses .......................................................................................... 75 3.2.1 The information signalling hypothesis .................................................................. 76 3.2.2 Non-information-related liquidity hypothesis ...................................................... 76 3.2.3 Information-related liquidity hypothesis .............................................................. 77 3.2.4 Imperfect substitute’s hypothesis ........................................................................ 78 3.2.5 Price pressure hypothesis ..................................................................................... 79 3.3 Comovement theories ................................................................................................. 80 3.3.1 The fundamental-based theory .............................................................................. 80 3.3.2 Behavioural based-theories ................................................................................... 83 3.3.3 The Combined effects ........................................................................................... 88 3.4 Empirical evidence ....................................................................................................... 91 3.4.1 Fundamental effects ............................................................................................. 91 3.4.2 Trading effects ...................................................................................................... 94 3.5 Summary and Conclusions ..........................................................................................
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