Essays on empirical asset pricing and firm investment behaviour in Egypt

This thesis presents essays on empirical asset pricing and firm investment behaviour in Egypt. Chapters 2 and 3 investigate returns patterns and factor equity pricing models, whereas Chapter 4 examines state ownership effect on firm investment behaviour. Chapter 2 contributes firstly by constructing a unique dataset of the cross section of the Egyptian stocks and an Egyptian version of Fama-French factors and stock portfolios. It also explores anomalies patterns in stock returns. Using portfolio sorts, it is found that anomalies patterns exist in average excess returns, especially the size and value patterns, with no investment effect for big stocks and profitability effect for micro stocks. However, cross sectional regressions on individual firms show the significant importance of the book-to-market ratio and profitability in predicting returns whilst momentum and asset growth are insignificant. Chapter 3 tests factor models for the period 2003-2017 contributing to the limited literature on asset pricing for emerging markets. Factor spanning regressions and multi-factor Gibbons, Ross and Shanken (GRS) tests reject the Fama-French three (1993) and six-factor (2018) models in favour of the five-factor model (2015). Nevertheless, some metrics of dispersion and regression details offer better support to the three-factor model for other test assets than Size-Profitability portfolios, owing to its role in pricing micro stocks. Lastly, the investment and momentum factors are redundant in explaining average returns. In Chapter 4, findings show that state ownership is accompanied with lower investment levels and poor investment efficiency for the period 2006-2017. State ownership reduces firm's financial constraints, which can be explained by soft budget constraints that state controlled firm may enjoy. However, state firms do not heavily use bank credit as a channel of softening the budget constraints. Channels of investment inefficiency associated with state ownership are mainly agency costs and soft budget constraints.