MEASURING GLOBAL STOCK MARKET EFFICIENCY

Abstract

This paper studies global stock market efficiency on the basis of Bernard and Thomas’s (1990) “delayed response” hypothesis, and Lee and Rui’s (2011) works on investor perceptions of earnings processes and post-announcement drift. With an application of the proxy for investor perception on the temporary and permanent earnings driven from Nelson’s decomposition techniques, the stock market efficiencies of 11 countries were estimated. By assuming that investors will put weights on each permanent and temporary earnings process as they expect future abnormal returns, this study uses the weight on the temporary earnings process as an estimation proxy for stock market efficiency. From La porta et al (2000), it is possible to think that market efficiency is closely related to investor protection and effectiveness of law enforcement. On the conjecture that good investor protection, effectiveness of law enforcement, and well established accounting standards lead markets to become more efficient, the market efficiency of 11 countries are estimated with a newly developed measure, and then compare the result to indices of La porta et al (2000) that show the degree of investor protection, the effectiveness of law enforcement, and accounting standards. The average market efficiency of Scandinavian civil law countries (Finland, Sweden) is 0.82, the highest score among the four legal origins examined, as the countries are well equipped with efficient legal systems to protect investors, and with the best accounting standards in La porta et al (2000). French (Italy, Spain) and German (Austria, Germany, Greece) civil law countries show little difference in average market efficiencies as they have a similar level of investor protection and legal enforcement efficiency in study of La porta et al (2000). All in all, estimation result of market efficiency is consistent to study of La porta et al (2000).