Testing the cost of capital effects of Taiwan’s first stock market liberalization

We synthetically test the cost of the capital effects for Taiwan’s first stock market liberalization using firm-level data. We find that Taiwan-listed firms experience an average monthly stock price revaluation of 1.713% during liberalization and that both expected returns and volatility are decreased following liberalization. Consistent with Errunza and Losq’s (1985) international asset pricing model and Merton’s (1987) investor recognition hypothesis, the liberalization-induced revaluation is positively related to the potentials of diversification benefits and negatively related to the cost of incomplete information and local market beta. However, liquidity fails to explain the positive revaluation.