There were forty equity stocks listed on the stock exchange of Mauritius as at end of December 2004. Fama and French (1993) posit that a possible explanation for the size and book-to-market equity effects could be due to other risk factors not captured in a standard capital asset pricing model. This paper therefore investigates whether on the stock exchange of Mauritius, when taking into account the time variation in risk (as measured by time-varying betas), the two additional factors are still priced. The paper presents an augmented model, which takes into account the time variation in beta, in addition to the size and book-to-market equity factors. It is found that the coefficients for the size effect and the book-to-market equity effect are all significant at the one percent level and with the expected signs. These effects do not disappear. This shows that the Fama and French three factor model is robust to taking into account time-varying betas.

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Initial public offering (IPO) financial strength measures are created to examine both the initial underpricing and aftermarket performance of firms in an emerging market. We find that the initial underpricing is positively related to financial strength as proxied by cash flow and sales. Since bond ratings do not exist in Mauritius, a return-to-risk meas ure and Altman's z-score serve as proxies for financial strength. Using these measures, the aftermarket performance results indicate that net income is more higbly valued for strong firms. When net income is separated into dividends and earnings retained, we find dividends are valued more highly than earnings retained for firms in Mauritius.

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