Fundamental, Stock Market, and Macroeconomic Factors on Equity Premium – Evidence from Indonesia Stock Exchange

• Published in: Journal of accounting, finance and auditing studies finance and auditing studies, 2022-07, Vol.8 (3), p.161-186
• Main Authors: Basri, Basri, Kusuma, Hadri, Arifin, Zainal, Hardjito, Dwipraptono Agus
• Format: Article
• Language: English
• Subjects: Capital assets; Emerging markets; Equity; Foreign exchange markets; Foreign exchange rates; Inflation; Influence; Investments; Macroeconomics; Portfolio management; Risk premiums; Securities markets; Stock exchanges; Stock prices; Variables; Volatility
• ISSN: 2149-0996; 2149-0996
• DOI: 10.32602/jafas.2022.022

Purpose: The equity premium influences investors' investing decisions, as well as their savings, spending habits, and portfolio allocation between risk-free and risky assets. Researchers have used different economic variables as potential predictors of the equity premium. However, research on determinants of equity risk premiums in emerging markets is less studied. This study aims at investigating the influence of fundamental (debt/equity ratio, dividend pay-out ratio), stock market (beta, stocks price volatility, liquidity), and macroeconomics factors (inflation and exchange rate) on the equity premium in Indonesia. Methodology: Data was collected from a 213 sample of stocks listed in the Indonesia Stock Market for January 2007 to December 2014. Data panel regression was performed to evaluate the impact of fundamental and stock market factors, measured in 16 semesters. Time-series regression was conducted to assess the impact of macro-economic factors, measured monthly. Findings: We find that debt ratio, dividend ratio, beta, stock prices volatility, and exchange rate are positively related to the equity premium while inflation had a negative relationship. Stocks liquidity did not play a significant role in explaining the equity premium. Originality/Value: This study offers insights for investors to determine reasonable returns based on information about the significant determinants in the Indonesia Stock Market. Purpose: The equity premium influences investors' investing decisions, as well as their savings, spending habits, and portfolio allocation between risk-free and risky assets. Researchers have used different economic variables as potential predictors of the equity premium. However, research on determinants of equity risk premiums in emerging markets is less studied. This study aims at investigating the influence of fundamental (debt/equity ratio, dividend pay-out ratio), stock market (beta, stocks price volatility, liquidity), and macroeconomics factors (inflation and exchange rate) on the equity premium in Indonesia. Methodology: Data was collected from a 213 sample of stocks listed in the Indonesia Stock Market for January 2007 to December 2014. Data panel regression was performed to evaluate the impact of fundamental and stock market factors, measured in 16 semesters. Time-series regression was conducted to assess the impact of macro-economic factors, measured monthly. Findings: We find that debt ratio, dividend ratio, beta, stock prices volati