TITLE : SECURITIES MARKETS & STOCK PRICING: EVIDENCE FROM A DEVELOPING CAPITAL MARKET IN ASIA.

The book contains 33 chapters organised into seven parts. Each part addresses the key issues for a scientific study of the behaviour of securities markets and firms, which use these markets. Part one is an overview of the book which summarises the major modern ideas on the received securities pricing theories in finance. In part two we endeavour to analyse a dozen developing capital markets in Asia in terms of key characteristics shared by these markets.

Readers will find in parts three and four an orderly presentation of the ideas on (i) measuring risk and return of securities in thinly-traded securities markets and (ii) market efficiency in such markets. These parts set the stage for investigation of the securities pricing ideas using valuation theories/models that have revolutionised modern-day security trading all over the world. Theoretical ideas on the pricing of stocks, options, warrants and futures in a developing context are applied. The sixth part is concerned with the financial behaviour of firtris, about capital structure, dividends, earnings, etc. The final part includes evidence on the performance of unit trusts (mutual funds) and market timing.

The ideas covered in the book are meant as a comprehensive introduction for any serious inquiry of the functioning of a developing capital market. The methodology and model-building effort that has gone into each chapter could be of special interest to students pursuing finance courses in the universities while the practitioners (accountants, treasurers, financial analysts, regulators, chief executives, etc.) may find, in the findings reported in each chapter, a wealth of information for their decision-making about investments. The serious students wishing to study a developing capital market may find this book an invaluable guide.

The very same ideas covered in this book have been applied in the study of major developed capital markets. Serious students of finance investigating the financial behaviour of firms and the economic behaviour of capital markets in such developed economies as Australia, England and United States have drawn inspiration and guidance in Lorie and Brealey's book, Modern Developments in Investments Management, published in 1976. Practitioners and students had access in one volume to the major ideas and practical research procedures that have today shaped the contents of what are termed corporate finance and investment, two very important areas of endeavour in the stewardship of, businesses and in the teaching of finance at all levels.

The results reported in that now famous book from carefully framed analysis of the various financial aspects of firms (e.g. dividends, earnings, stock prices, etc.) and the economic behaviour of the capital markets (e.g. securities pricing, market efficiency, etc.) were obtained in a well-functioning, intensely competitive and a substantially large capital market. The major ideas included in that book on security valuation have been framed under stringent assumptions about market conditions and firm behaviour that are very seldom met in the less developed Asian or other capital markets nor in the closely-held firms in developing economies, which are often managed by the major shareholders. Do the ideas on security pricing and firm behaviour framed for the developed capital markets hold up in the less developed emerging or developing capital markets? If these ideas do not hold, what analytical innovations are needed to study a typical developing market in Asia, Europe or South America? What are the implications for the practitioners, the executives managing the firms and the investors placing their savings in a developing capital market?

Thus the motivation for embarking on the preparation of this book is the desire to apply the most up-to-date, state-of-the-art major ideas to the study of the developing capital markets and the examination of the financial behaviour of firms in such markets to serve as a summary of the relevance of these ideas for stock pricing and the refinements needed for applying these ideas to such markets.

This effort has taken several years with the dedication of all of those who have contributed in some way to or collaborated in research towards the completion of this book. While the major ideas that shaped modem finance have been vindicated in the developed markets in two very well known works (Ball, Brown, Finn and Officer, 1980 and 1989 in Australia and Hawawini and Michel, 1984 in Europe), there is as yet no comprehensive book on any developing capital market. We hope this book fills the void, and that many more such books for specific developing regions of the world are written soon.

We acknowledge with sincere thanks the several senior academics who served as international reviewers and commentators for sparing their time to review the chapters of the book at short notice. Those whom we wish to name are: Bala V Balachandran (Northwestern University), George Kester (Bucknell University), Annie Koh (University of Michigan and the National University of Singapore), Douglas Lamont (Northwestern University), Lim Kian Guan (National University of Singapore) and Nalin Kulatilaka (Boston University). Let us hasten to add our appreciation for the timely advice, encouragement and reminders from Sheila Murugasu of Longman at the time of preparing the manuscript: her expertise at various stages of the compilation of the book is much appreciated.

We hope that the many co-authors including our students who collaborated on this effort may find the effort worthwhile. This comment also applies to the several research assistants who helped at various stages of the development of the book: though there were several of them, we like to name Aw Eng Lim, Aw Kian Huat, Justin KM Lim, Low Chee Kiong and Wong Keng Siong. Miss Fang Tso Ie, who typed the manuscript, deserves a special mention as she must have been relieved to see the end of the book after three-and-a-half years at it. We acknowledge our gratitude to the authors of the five invited chapters, and the editors of journals, who gave us permission to print published articles in this book. A special word of thanks is reserved for Professor Frank J. Finn of the Department of Commerce of the University of Queensland for his encouragement of this endeavour.

Mohamed Ariff Lester W. Johnson April 1990