1. Explaining the Value Premium around the World: Risk or Mispricing? Discussant: Yanzhi Wang Department of Finance National Taiwan University 1

2. Main findings This paper empirically examines the predictions of the risk- based explanation versus the mispricing hypothesis with limits-to-arbitrage on the value premium around the world. The authors use the uncertainty avoidance index and the individualism index to measure investors’ attitudes-toward- risk and use the transaction cost index and market development measures to proxy for limits-to-arbitrage. Our cross-country results in general appear to be consistent with the risk-based explanation but fail to support the mispricing hypothesis. This paper is interesting and comprehensive, I think this paper prefect. All my comments could be wrong, yet I still have to be picky as a discussant. 2

3. Tests on mispricing story Market cap and index of access to equity markets are originally constructed and used by La Porta, Lopez-de-Silanes, and Shleifer (2006) to proxy for equity market development. These two measures seem to be capture the cost that firm initially finance at the equity market, which is for primary market. Yet limit-to-arbitrage seems to be the issue in the secondary market. For example, we seldom make arbitrage when one firm goes IPO. Thus, I am asking myself whether a country with high market cap (or high access-to-equity index) has low degree of limit- to-arbitrage? 3/79

4. Tests on mispricing story Try idiosyncratic volatility, price, trading volume as the limit- to-arbitrage proxy (Lam and Wei, 2011)? How can we interpret these firm-level limit-to-arbitrage proxies and those currently employed country-level limit-to-arbitrage proxies? – Could endogeneity concern be a good reason? Firm-level limit-to- arbitrage measures could be greatly affected by B/M or vice versa. – What else? 4/79

5. Tests on mispricing story Daniel and Titman (2006) intangible return – Upon the B/M decomposition, future stock return is related to intangible return. – If firms with low intangible return are more likely to be undervalued, then we can test this using your global data. – Yet the price-adjust factor could not be available for many countries. How about prior return as another indicator for mispricing (Peyer and Vermaelen, 2009) – For low prior return subsample, do limits-to-arbitrage variables work? 5/79

6. Test on risk story Pontiff and Woodgate (2008) show slopes of NS from Fama-MacBeth regression in time series. This paper can do the same thing to show the risk. – Slopes should go around zero and be more volatile for those countries with high uncertainty avoidance index (or low individualism index) 6/79

7. Methodology issue Long-term impact (Pontiff and Woodgate, 2008; 2009) – Use one-month, one-year, two-year and three-year BHR as dependent variables in Fama-MacBeth regression. Some additional control variables (see Table 7 of Pontiff and Woodgate, 2009). For example, – Law origin – investor protection (La Porta, Lopezde- Silanes, and Shleifer, 2006) – Earnings management (Leuz, Nanda, and Wysocki, 2003) 7/79

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