SOCIAL SCIENCES INSTITUTE BUSINESS ADMINISTRATION DEPARTMENT ATTRACTIVENESS OF THE BOSNIAN STOCK MARKET Comparing Bosnian, Croatian, Macedonian and German stock markets; focusing on size, diversity, volume, liquidity, risk and return Master Thesis Mirza Avdagić Student No: 1450Y42104 Supervisor: Prof. Dr. Özgür Çengel Istanbul, 2017 Acknowledgment By most accounts my life should have been over before it even began. Before I was Mirza I was a small number besides a percentage sign. I came into this world three months early and the doctor told my mother that in all likelihood I would probably make a hasty exit as well. He was wrong. I suppose it was that same attitude, the one that made me over eager to get this party started that also kept fighting in those early, intense moments of my life. I've been fighting ever since. After two years in United World College (UWC) in Mostar and four years in the US, living and studying in Turkey was very challenging. Different culture and new language presented another milestone I had to achieve in my life. Writing the dissertation was not an easy task. Having a full time job in Bahrain and working on the thesis simultaneously was in times very challenging but towards the end very enjoyable. Most importantly, I would like to thank my supervisor Dr. Özgür Çengel, who cared so much about my work, and who always responded to my questions and queries so promptly. This journey would be completely different and more challenging without his support and guidance. I just want you to know that I really appreciate everything you have done for me. Thank you! 3 Abstract The study seeks to evaluate the attractiveness of Bosnian stock markets and determine whether consolidation of SASE and BLSE would increase the overall attractiveness of the Bosnian stock market. The current studies on capital markets of Bosnia and Herzegovina are very limited. Most studies focus on comparing the performance of Bosnian stock markets to large international stock markets from the United States, Germany and the United Kingdom. Research studies that focus on Bosnian stock markets are shallow and focus on the functionality of the stock exchanges in general. The aim of this study is to assess the attractiveness of stock markets in Bosnia and find whether consolidating Sarajevo and Banja Luka stock exchanges would make the Bosnian stock market more attractive. Knowing that investors have the opportunity to invest in more than one market, it is important to have a fair understanding of the assessment criteria for the stock market. Listing standards, fees and regulatory environment are important factors to consider when selecting a stock exchange. However, as important, if not more so, are factors such as size, diversity, volume, liquidity, risk and return (or together “Attractiveness Factors”). Stock market’s Attractiveness Factors are essential part in determining company’s valuation and play an important role in investors’ decision-making process. To determine the attractiveness, using the stock market Attractiveness Factors (i.e. size, diversity, volume, liquidity, risk and return), the study compares Bosnian stock markets with Croatian, German and Macedonian (or the “Focus Markets”). The study analyzes the composition of the Focus Markets and their main indexes providing the support for Sarajevo and Banja Luka stock exchange consolidation. The outcome of the study contributes to the understanding of Bosnian capital market and stock exchange Attractiveness Factors. Moreover, it emphasizes on the benefits of larger stock markets, ultimately providing support for stock market consolidation of the small exchanges. Key Words: Stock Market, SASE, BLSE, ZSE, FSE, MSE, Bosnia and Herzegovina, Croatia, Macedonia, Germany, Consolidation. 4 Özet Çalisma Bosna Hersek borsasının cazipligini ve Saraybosna ve Banja Luka borsalarının birleşmesi durumunda Bosna borsasının daha çekici olabilirliği sorunu değerlendirmektedir. Borsa seçiminde listeleme standardı, ücretler ve mevzuat önemli faktörlerdir. Ancak, bunlar kadar önemli diğer faktörler de boyut, çesitlilik, hacim, likitide, risk ve geri dönüş (veya birlikte “Caziplik Faktorleri”). Caziplik Faktorleri şirket değerlendirmesinin temel parçasıdır ve yatırımcının karar verme sürecinde önemli rol oynamaktadir. Borsanın ne kadar cazip oluduğuna karar vermek icin, Caziplik Faktorunu kullanarak, çalişma Bosna Hersek Borsasını Hırvatistan (“ZTE”), Almanya (“FSE”) ve Makedonya (“MES) (veya “Odak Marketler”) ile karşılaştırmaktadır. Çalışma Odak Marketlerin yapısını ve ana indekslerini kullanarak Bosna Hersek borsasını analiz etmektedir. Ana Kelimeler: Borsa, SASE, BLSE, ZSE, MSE, Bosna Hersek, Hirvatistan, Makedonya, Almanya 5 Table of Contents Acknowledgment ................................................................................................. 3 Abstract ............................................................................................................... 4 Özet .................................................................................................................... 5 Table of Contents ................................................................................................. 6 List of Tables ........................................................................................................ 8 List of Figures ....................................................................................................... 8 Abbreviations ...................................................................................................... 9 I.INTRODUCTION ................................................................................................ 10 A. Motivation of the study:............................................................................... 10 B. Problem statement: ..................................................................................... 10 C. Research questions: ..................................................................................... 11 D. The scope of the current studies: ....................................................................... 11 E. Master thesis organization: aim & purpose .......................................................... 12 1.0 Bosnia and Herzegovina Country Background ..................................................... 13 1.1 Government of Bosnia.................................................................................... 13 1.2 Demographics of Bosnia ....................................................................................... 14 1.3 Economy of Bosnia............................................................................................... 15 2.0 Bosnian Stock Market Overview ........................................................................ 19 2.1 Sarajevo Stock Exchange ...................................................................................... 19 2.1 Banja Luka Stock Exchange (BLSE) ................................................................. 22 1) The RS Stock Exchange Index (BIRS) ........................................................................ 22 2) The RS Investment Funds Index (FIRS) ..................................................................... 23 3.0 Benchmark Countries and Indices background .................................................... 25 3.1 Croatia ................................................................................................................ 26 3.2 Macedonia .......................................................................................................... 28 3.3 Germany ............................................................................................................. 30 II. THEORITICAL FRAMEWORK ............................................................................. 32 1.0 The Concept of Stock Exchange......................................................................... 32 1.1 Capital Markets ................................................................................................... 32 1.2 Why Stock Market ............................................................................................... 33 6 2.0 Attractiveness of the Stock Market ................................................................... 36 A. Size & Diversity .................................................................................................. 36 B. Volume ............................................................................................................. 38 C. Liquidity ............................................................................................................ 39 D. Risk ................................................................................................................... 41 E. Regulations ....................................................................................................... 41 F. Return .............................................................................................................. 42 III. RESEARCH METHODOLOGY ............................................................................ 43 1.1 Research approach and research philosophy: ..................................................... 43 1.2 Primary Data: ................................................................................................. 43 1.3 Secondary Data: .............................................................................................. 44 1.4 Reliability of results and evaluation: .................................................................