Liquidity and Stock Size Premia in Japanese Regional Financial Markets: An Industry Level Analysis

32 Pages Posted: 12 Jan 2010 Last revised: 27 Sep 2010

See all articles by Bruce Allen Hearn

Bruce Allen Hearn

University of Southampton

Byoung Youp Lee

University of London, King's College London, Department of Management

Roger Strange

University of Sussex

Jenifer Piesse

University of Stellbosch; King's College London - Department of Management

Date Written: January 12, 2010


Equity markets are increasingly being seen as having a important role within the financial architecture focused towards the financing of Small and Medium Enterprises (SME) firms that dominate regional economies. The high costs involved with lending small amounts to smaller firms in the presence of asymmetric information and the lack of economies to scale substantially reduce the competitiveness of the banking system in issuing cost effective relationship-based finance. Consequently well designed development and alternative investment boards with effective regulation and enforcement of disclosure rules can substantially reduce the high costs normally associated with stock exchange financing options. The Japanese regional exchanges have been able to reap significant economies of scale in achieving horizontal integration of their operations with a common clearing, settlements and payment systems largely through having a shared stable macroeconomic environment. While this enables their ability to compete with the lethargic regional banking sector it also facilitates the study of the informational premiums arising from the asymmetric information of focussing on SME financing. This paper estimates the costs of equity across major industry sectors in the three Japanese regional stock exchanges of Nagoya, Fukuoka and Sapporo as well as the very different internationally-focussed markets of Tokyo and Osaka. The Fama and French (1993) three-factor model Capital Asset Pricing Model is augmented to take account of company size and illiquidity factors that are prominent in regional markets. Results show that premia associated with size are dominant in valuation and cost of equity estimates for the international exchanges of Tokyo and Osaka while liquidity is the dominant factor in the three regional markets. Costs of equity are very low in Tokyo and much higher in Osaka, reflecting the limited role of the equity market in the latter in contrast to its specialization in other financial products. Costs of equity are substantially higher in all three regional exchanges reflecting a high informational or liquidity premium.

Keywords: Japan, Capital Asset Pricing Model, Liquidity, Regional Financial Markets

JEL Classification: G12, G15, O16

Suggested Citation

Hearn, Bruce Allen and Lee, Byoung Youp and Strange, Roger Nicholas and Piesse, Jenifer, Liquidity and Stock Size Premia in Japanese Regional Financial Markets: An Industry Level Analysis (January 12, 2010). Available at SSRN: or

Bruce Allen Hearn (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Byoung Youp Lee

University of London, King's College London, Department of Management ( email )

150 Stamford Street
London, SE1 9NH
United Kingdom

Roger Nicholas Strange

University of Sussex ( email )

School of Business, Management and Economics
Mantell Building
Brighton, Sussex BN1 9RF
United Kingdom
(44)1273-873531 (Phone)

Jenifer Piesse

University of Stellbosch

Stellenbosch, Western Cape
South Africa

King's College London - Department of Management ( email )

Virginia Woolf Building
22 Kingsway
London, England WC2B 6NR
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics