اتحادیه اروپا بزرگ و بازار سهام حقوق صاحبان در کشورهای در حال الحاق

The announcement of the European Union enlargement coincided with a dramatic rise in stock prices in accession countries. This paper investigates the hypothesis that the rise in stock prices was a result of the repricing of systematic risk due to the integration of accession countries into the world market. We found that firm-level stock price changes are positively related to the difference between a firm's local and world market betas. This result is robust to controlling for changes in expected earnings, country effects and other controls, although the magnitude of the effect is not very large. The differences between local and world betas explain nearly 22% of the stock price increase.

The announcement of the European Union (EU) enlargement coincided with the beginning of a dramatic rise in stock prices in candidate countries. Between November 2001, when the European Commission outlined the timing and named countries involved in the enlargement, and July 2004, stock prices in the eight Central and Eastern European candidate countries increased on average by over 90% in dollar terms.1 In comparison, the world market index returned about 8% during the same time period. This paper investigates whether the rise in stock prices in the accession countries was a result of repricing of systematic risk due to the integration of local stock markets into the world market. In a segmented market, the source of systematic risk of each firm is the covariance of its returns with the local market. By contrast, in an integrated market, the source of systematic risk is the covariance of a firm's returns with the world market. The covariance of individual firm returns with the world market is likely to be smaller than the covariance with a local market. Thus, a move from a segmented to an integrated market should lead to a fall in systematic risk and to a permanent price increase. It is possible that a credible announcement of the EU enlargement led to an integration of the previously segmented Central and Eastern European stock markets with the rest of the world. Although foreign investors were allowed to invest in the accession countries for some time prior to the enlargement announcement, some foreigners may have refrained from investing in legally open markets because of real or perceived political, liquidity, and corporate governance risks. Clear prospects for the EU accession may have alleviated these risks and increased the integration of local markets with the world market. Such integration would have led to a fall in systematic risk and a rise in stock prices. Repricing of systematic risk following market integration was tested on stock market liberalizations in Asia and Latin America in the late 1980s and early 1990s. At the aggregate level, Henry (2000) and Bekaert and Harvey (2000) find that market integration leads to a permanent increase in the stock market index. This finding is consistent with shares being priced according to the market's covariance with world returns rather than according to the much larger variance of local market returns. Using firm level data, Errunza and Miller (2000) find that firms which offer American Depositary Receipts (ADRs) experience abnormal returns following the ADR announcement and that these returns are related to the diversification potential of each firm. Chari and Henry (2004) also examine the repricing effects of market integration at the firm level. They find that firms that experience larger changes in systematic risk upon integration also experience larger repricing. The change in systematic risk explains about 40% of the stock price increases upon integration. Our paper follows a similar strategy. It uses firm level data to calculate the changes in systematic risk for each firm, and examines whether changes in systematic risk are proportional to stock price changes while controlling for other simultaneous events, mainly the changes in expected future earnings. As a control group we include three Eastern European countries that were not part of the first wave of the EU enlargement. If the EU enlargement is responsible for the integration, repricing should occur only in the eight countries included in the enlargement. Understanding whether repricing of systematic risk took place in the EU accession countries is important for at least three reasons. First, it allows us to evaluate the benefits of the EU integration. Integrated capital markets should deliver a lower cost of capital leading to higher investment and growth. The lower cost of capital should come from the reduction in the risk-free interest rate as well as the reduction in systematic risk. The reduction in systematic risk will benefit firms only if this risk is correctly priced by the market. If it is, then the benefits of the EU integration extend beyond access to larger markets. In this sense, this paper complements a growing literature on stock market integration in the original 15 EU members (for a comprehensive survey see Chapter 8 in Baele et al., 2004). Second, finding out whether changes in systematic risk are priced by the market is important beyond the context of the EU enlargement. Greater risk sharing is one of the frequently emphasized benefits of open capital markets (see, for example, Stulz, 1999). It is worthwhile to investigate whether risk sharing is actually priced by the market. In a similar vain, capital market integrations also provide a unique opportunity to test the asset pricing models in differences rather than in levels. This argument is forcefully made by Chari and Henry (2004) who argue that liberalizations are natural experiments which deliver power to detect cross the sectional relationship implied by the asset pricing model. The EU enlargement is another such natural experiment where there is a large, arguably exogenous, change in the source of firms' systematic risk. Many existing papers point out that capital market liberalizations are often associated with other events which may lead to higher expected profits.2 This makes it difficult to separate the repricing effect from the effect of an increase in the expected growth rate of dividends. This is also an issue in the context of the EU enlargement. The EU accession provides better market access for Central and Eastern European firms and increased assistance from the EU budget which could have led to greater consumer confidence following the prospects of the EU membership. The adoption of the EU laws and standards may result in improved corporate governance. We control for the changes in expected growth of dividends by using changes in analysts' earnings estimates. We use data from the IBES on expected earnings as of the time of the announcement of the EU enlargement. This is in contrast to both Errunza and Miller (2000) and Chari and Henry (2004) who attempt to control for an increase in the expected dividend growth by using changes in actual, rather than expected, earnings and dividends. Dating market integration is notoriously difficult (see Bekaert et al., 2003 for a survey of methods). Integration depends not only on legal restrictions, but also on investors' willingness to participate in open markets. We hypothesize that the integration increased in the months following the 2001 announcement of the EU enlargement. Since an increase in integration should be associated with a price increase, the post-2001 rise in aggregate stock prices shown in Fig. 1 and mentioned earlier is consistent with integration. If integration occurred earlier, we should see a sharp price increase prior to 2001. However, with the exception of Poland, the post-2001 boom in prices is unprecedented. Section 3 provides some additional evidence that foreign investors seriously considered the Central and Eastern European markets only once it became clear that these countries would become part of the EU. Since we can never be fully confident of the integration date, it is possible to view our analysis as a test of joint hypothesis that integration occurred in the months after the 2001 announcement and that markets price stocks according to their systematic risk.

This paper examines the hypothesis that the dramatic increase in stock prices in the EU accession countries following the announcement of the EU enlargement was a result of market integration and the subsequent re-pricing of systematic risk. We tested two versions of this hypothesis: one in which integration is associated with a change in the market premium, and one in which the market premium is constant. In the first version, the change in systematic risk is measured by the difference between the covariance of returns with the local market and the covariance of returns with the world market. The differences in local and world covariances do not appear to be related to the changes in stock prices. In the second version, the change in systematic risk is measured by the difference between local and world betas. The evidence suggests that at least part of the stock price increase can be explained by the difference between stocks' local and world betas. Stocks that had high local beta but a low world beta experienced a higher price increase than other stocks. We also test whether the dramatic rise in stock prices is a reflection of an increase in expected earnings. We find that changes in expected earnings are consistently related to changes in stock prices. An upward revision of expected earnings has a positive impact on a firm's stock price. Our finding that a measure of the change in systematic risk explains changes in stock prices is consistent with the findings of Chari and Henry (2004). Changes in systematic risk are followed by proportional changes in stock prices. Unlike Chari and Henry (2004), however, we do not find that the difference in covariances matters, but we do find that the differences in betas are important in explaining stock price changes. Covariances should matter when investors update their estimate of the market premium using historical variances. Since Central and Eastern European markets have limited historical data, investors may not use historical variances to estimate market premia. Instead our results suggest that investors use CAPM mechanically, i.e., discounting future cash flows using local betas prior to the announcement of the EU accession and using world betas after the announcement. We find the significance of the differences in local and world betas for explaining price changes rather striking. This is because as an empirical question, the odds are stacked against finding this effect. First, we have only 74 observations and 12 explanatory variables (including country effects), which leaves few degrees of freedom to estimate the coefficients with precision. Second, we rely on betas calculated using historical data, implicitly assuming that investors consider historical betas as an accurate guide to what betas will be in the future. Given that the countries are undergoing dramatic changes, this may be a strong assumption. In some sense, increased integration itself could bring a change in the structure of the economy and alter the pattern of co-movement of returns. We rely on the assumption that the degree of co-movement of returns is determined in the product markets and that product markets had been integrated well before capital market integration. Thus, capital market integration is not expected to have an effect on covariances or on betas. Finally, estimating the repricing effect is hard because there is considerable uncertainty about the timing of stock market integration. Our findings should give impetus to further integration. This is because capital market integration has the effects predicted by the standard international asset pricing model. Following the announcement of the EU enlargement, investors did re-value firms according to their systematic risk and firms benefit from capital market integration according their capacity to diversify risk for the global investor.