Docstoc

Stock Price React to Investment

Document Sample
 Stock Price React to Investment Powered By Docstoc
					           STOCK PRICE REACT TO INVESTMENT REGION
         ANNOUNCEMENT: THE CASE OF LISTED ELECTRONIC
                         COMPANIES

                                      Yi-Hsien Wang
                        Department of Finance, Yuanpei University,
                     No. 306, Yuanpei St. Hsin Chu 30015, Taiwan ROC
                                holland@mail2000.com.tw

                                       Pei-Shan Syu
                        Department of Finance, Yuanpei University,
                     No. 306, Yuanpei St. Hsin Chu 30015, Taiwan ROC
                               r636363636363@yahoo.com.tw

                                        Wan-Yi Tsai
                        Department of Finance, Yuanpei University,
                     No. 306, Yuanpei St. Hsin Chu 30015, Taiwan ROC
                                angela0237@yahoo.com.tw

                                      Chi-Hsin Wang
                        Department of Finance, Yuanpei University,
                     No. 306, Yuanpei St. Hsin Chu 30015, Taiwan ROC
                                 sky36951@yahoo.com.tw

                                         ABSTRACT

     This study utilizes listed electronic companies data to explore the difference of
announcement of investment region (China and Taiwan) on stock price reaction during
2000-2006. The empirical result shows that investment in China has significant abnormal
return before 3 days, and abnormal return appears at days -14 and -10 in Taiwan.

Keywords: Depositary Receipts, Event Study, Abnormal Returns, Announcement Effect

                                    1. INTRODUCTION

In recent years, Taiwanese industry promptly developed, electronic industry not only has
become main stream of Taiwan stock but also has become combined with prosperity and
decline of Taiwan economy. Therefore, we chosen electronic stock regard as portfolio one
section, become investor prior choice, however, industrial structure diversified highly and
globalization trend for electronic industry, which will confront with competition result in firm
gradually moving-abroad, economies and trade territories enlarged with positive benefit for
exportation of Taiwanese electronic industry.

Furthermore, economic environment had changed for many years that made investors to
develop outside gradually. Owing to economic growth of Taiwan had reached the highest
point and execution of economic policy of government, therefore the results restricted to
develop for many corporations. Therefore companies want to obtain the biggest yield, they
should choose to overseas investment.

Afterwards connected cultural heritage detection, some literatures find that the news of listed
corporation goes into overseas investment has the effect of positive and non-significance for
shareholder wealth. Nevertheless that different investment areas for stockholder wealth is not
obvious distinction, but the reaction of stock market for different investment type is different.
Overseas Merger & Acquisition (M&A) news was disclosed for acquiring firms can gain
significant cumulative abnormal return (Franks et al., 1989; Duggal, 1995).

In addition American corporation with joint venture type carry on outward investment for
stock price influence, on announce that day have not outstanding negative abnormality
remunerate (Finnerty et al., 1986; Doukas et al., 1988; Lee et al., 1990, Chung et al., 1993;
Borde et al., 1998).On international joint venture modus carry on china investment, for
stockholder, then get outstanding positive accumulation riches effect, (Chen et al., 1991).

Currently influence stock return factor have many, as King (1996) influence factor is
classified into market factor, industry factor and company factor etc. three-factor model.
Company factor is can capitalize on portfolio lower not system risk, example: profit,
dividend etc. factor.

General investment the public usually not have analyst or investment organization profession
competency, can't quick receive connected message. Investor usually by enterprise public of
information as investment basis, on announce day in front and back for stock price produce
of abnormality change influence for what reason.

Because this paper event study inquire into corporation graveness investment announce to
object stock investment of influence. By extensive domestic listed company investment
announce connected cultural heritage, take into classification inquire into, aim at investment
china with no china of location research sample, announce day to stock price influence,
meanwhile observation market observation information of reflection whether have efficiency,
by understanding connected research of development and current conditions, beg more
exactitude of result. The paper is organized as follows. Section 1 sets out the purpose of this
document and provides a review of prior research on the listed companies investigated
announcement. Methodology and data are described in Section 2, with Section 3 discussing
the results, and Section 4 presenting the conclusions.

                                       2. LITERATURE

2.1 Data source

The sample data is from January 1, 2000 to March 20, 2006 for all listed electronics company
of stock price and weighted stock index etc., draw from Taiwan Economic Journal include
listed electronic stock graveness investment event, investment area, investment amount,
equity control, above-mentioned data from Market Observation Post System. These data was
examined as the influence of investment area of listed electronic company for stock price
reaction, we adopted event study to investigate the data choice period whether stock price
return is significant and positive relation.
2.2 Estimation period and event period

Because of the exposed company has important investment event, actually this event should
be produce before one day. Therefore, this study acquired the time point of the listed
companies investigated announcement by the public information and defined the time point
as Day 0 (event day). Consequently, the estimation period is from Days -105 to -16. The
event window of interest begins from Day -15 and ends on Day +15, and entire observational
period covers 121 trading days. The each period related show to Fig.2.2.1


                         Estimation period               Event window

             -105                                -15            0        +15

                                                          Event day
                                    Observation period



                    Fig.2.2.1 The diagram of event studies the period


2.3 Event study and methodology

This research applied market model to inquire into Taiwanese listed companies investigated
announcement which impact on stock price. Therefore, it produces the abnormal returns (AR).
The method had already applied extensively in the finance and accounting. So far, the
research approach of the evidence is still important. The market model of the event study is
as follows:

The expected return was derived using the market model where the model parameters  and
 were obtained from the estimation period. The market model hypothesis is the linear
relations between the individual stock return and the market return, namely



                               Rit   i   i Rmt   it                                  (1)

Where Rit is the return rate on stock i on day t and Rmt is the return rate on the TAIEX on
                                  
day t. i is the intercept term, i is the Beta modulus, that is system risk of individual
       
stock, it is the residual error term.

Examining abnormal return whether AR significantly differ from zero. In this research, we
make use of data characteristic choice to choose suitable test statistics, and examine the event
window whether have outstanding abnormal return, the influence of understanding particular
announcement event for stock price.

 Thus, if we want to proceed testing, we first have to calculate (average AR; AAR) definition
for
                                                     N
                                                1
                             AAR E 
                                                N
                                                     AR
                                                    i 1     iE
                                                                                           (2)

Where, N is corporation number, for event term n corporation AR.

In addition, researcher can depend on goal or some factor to accumulate the AR of event term
that be called cumulative average abnormal return (cumulative AAR; CAAR). Cumulative
average abnormality remunerate defines as follows,

                                                    2
                           CAAR( 1 , 2 )          AAR
                                                     
                                                    E
                                                             E                             (3)
                                                         1

We used individual stock AR to standardize, and calculated AAR and CAAR. Object is to
transform the distribution of AR into standard normal distribution, correspond with identical
distribution.

This method is ordinary cross-sectional method, which main goal in order to overcome the
variation of return rate, for event period, owing to the question of event-induce variance.
Therefore, we use the variation of estimate term to estimate the variation of event term AR is
not larger meaning.
                              AAR E                          AAR E
                      t                    
                                                                                2
                            Var ( AAR E )           1       N

                                                            ( ARiE  AAR E )
                                                N ( N  1) i 1                            (4)

                             3. RESULTS AND DISCUSSION

3.1 The announcement effect of the electronic industry investigated announcement in
    China

For electronics type stock in china investment announcement for stock price change of
influence sample market model and examination sample as follows form 4.1 show, on the
thirty day event observation medium, on declaration that day abnormality remunerate is
0.0605, t value is 0.6249, under on outstanding level α=0.01 and not outstanding. Event term
on the declaration after three day average abnormality remunerate is negative.

When company decision investment on china area after, have to event day before seven day
announce board of directors investment message, and event day before one day mark
decision. But form 4.1 among detection, t=-8 day not outstanding effect, display investment
message don't convene board of directors before leak out, on the contrary t=-3 day present
outstanding to positive result, this maybe because consideration cross-straits government
nervous relation, just event day before three day leak out news.

But t=0 day, news announce the public understand, stock market not positive reaction, cause
t=-1, -2, -3 day stock price fall, display investor for electronics type stock investment china
of news declare incipiency indicate negative attitude; but on t=4、5、6 day present not
outstanding positive result.

In Taiwan listed electronics company investment to China because of two sides policy of
different, can cause news not accurate of result, through short time observation after, investor
think company investment behavior definite can to company bring have positive benefit, just
give positive attitude response. generally speaking, investment area on china of investment
massage have perdurable, although china have cost cheap, market large, raw material
abundant environment advantage, but because cross-straits government nervous relation,
make investor on under process many today observation, just more audacious buy in
company stock, stock price produce abnormality remunerate. But stockholders uncertain to
company have confidence, only the company had slight commotion, stockholders sell out
hold stock, on the contrary stock price abnormality fall.

            Table 3.1 AR around investigated announcement date of all sample in China

   Event                                                       Event
                     AR                     t value                              AR        t value
  window                                                     window
    -15              -0.0514              - 0.5036                0               0.0605    0.6249
    -14               0.0077               0.0776                 1              -0.0349   -0.3636
    -13               0.0825               0.8405                 2              -0.1612   -1.7159
    -12              -0.0796              -0.8977                 3              -0.0108   -0.1155
    -11              -0.1128              -1.1749                 4               0.0650    0.6582
    -10               0.1026               1.0691                 5               0.0977    0.9695
     -9              -0.1032              -1.0134                 6               0.0353    0.3547
     -8              -0.0110              -0.1105                 7               0.2568    2.6044 **
     -7               0.1122               1.1162                 8              -0.0038   -0.0418
     -6              -0.0144              -0.1502                 9              -0.1015   -1.0936
     -5               0.0108               0.1131                10              -0.0308   -0.2981
     -4               0.1346               1.4328                11               0.1720    1.8126
     -3               0.2822               2.8363 **             12               0.0289    0.2959
     -2               0.0500               0.5334                13              -0.0411   -0.4312
     -1              -0.0925              -1.0050                14               0.1393    1.3816
                                                                 15              -0.0329   -0.3454
Note: 1. The * (**) denotes statistical significance at the 0.05 (0.01) level.
      2. The t value is computed by Standardized-Residual Cross-Sectional Method.


3.2 The announcement effect of the electronic industry investigated announcement in
    Taiwan
For electronics stock in China invest announce to stock price change effect sample market
model and examine sample as follows form Table 3.2, on 30th days event observe mid-term,
in fluctuation of day of stock price abnormal return is 0.0927, t is 0.2576, on notable level
α=0.01 descend not notable. Event period in fluctuation of stock price after two days average
excrescent guerdon rate also to positive relate.

Aim to t =-14 and t =-10 two days present notable and is positive excrescent guerdon rate, it
indicates result of appear on market company invest of Taiwan news, shareholder convene
board of directors a few days age leak out, company already have person advance have
learned that this news, and outwardly spread, therefore cause company stock price to convene
board meeting previous to present notable and positive relate.

Generally speaking, investor to invest district on Taiwan to graveness fluctuation of stock
price to do positive evaluate, on investor succession buy into this company stock, make stock
price produce excrescent guerdon rate, but investor to this fluctuation of stock price news to
positive evaluate can’t handle of long, make accumulate excrescent guerdon rate gradual
stable, company stock price go back originality normal orbit.

In Taiwan invest, maybe stock market rise a fall limit and market efficiency problem, cause
odd day stock price shortage to news content respond completely, in don't respond
completely reach balance stock before, on stock market investor possibility rob into rob out
to become over rise over fall trend. Although at fluctuation of stock price after third day have
the negative of excrescent guerdon rate, but whole to say, have positive information result.

           Table 3.2 AR around investigated announcement date of all sample in Taiwan

   Event                                                        Event
                      AR                   t value                               AR        t value
  window                                                      window
    -15               0.4163                1.1522                0               0.0927    0.2576
    -14               1.0164                2.9619**              1               0.2101    0.6384
    -13               0.2573                0.6593                2               0.0604    0.1615
    -12               0.5722                1.7140                3              -0.0704   -0.2017
    -11               0.1058                0.3175                4               05575     1.5004
    -10               0.8123                2.0577*               5               0.3808    1.0121
     -9              -0.2571               -0.6742                6               0.2817    0.7156
     -8              -0.4165               -1.4241                7               0.0826    0.2132
     -7              -0.0746               -0.1904                8              -0.2923   -0.7397
     -6               0.1111                0.3592                9              -0.5858   -1.7148
     -5              -0.0888               -0.2735               10               0.6326    1.7265
     -4               0.5721                1.7265               11              -0.2850   -0.7393
     -3              -0.3324               -1.0840               12               0.2807    0.6358
     -2               0.1281                0.3855               13              -0.3536   -1.1534
     -1               0.1569                0.5421               14               0.3004    0.8945
                                                                 15               0.3288    0.9358
Note: 1. The * (**) denotes statistical significance at the 0.05 (0.01) level.
      2. The t value is computed by Standardized-Residual Cross-Sectional Method.
3.3 The announcement effect of the electronic industry to compare investigated
    announcement in China and Taiwan

Listed company carry on invest money in China, because subjected to a government limit, so
money can not exceed $50,000,000 and exceed this money can not exceed carry on direct
invest, get through third ground invest or through subsidiary carry on invest, this is many
limit cause company to carry on China invest have timid.

Appear on market company in China carry on invest amount of money, but China market
environment, human resource, produce source also compare Taiwan have attraction, cause
currently in Taiwan main of appear on market electronics company gradual will productively
in Taiwan call away to China or other everyplace.

In Taiwan invest behavior can because government relate to have change, not equal to invest
of China pure. Because of Taiwan stock market rise a fall limit with market effect is
straightforward problem that cause odd day stock price shortage of news content complete
respond. And don't content complete respond reach balanced stock price, on stock market
investor possibility rob into rob out to become over rise or over fall trend.

News leak out speed Taiwan compare China faster, because cause this factor can region
difference, it invest of China company, because news deliver is slow, make stock price
present notable only event day before front three day; because region Relate to Taiwan, news
flow is fast, cause news advance before event front 14 and10 day leak out.

                                     4. CONCLUSION

This paper finds that company carries on investment announcement in China that has
positively excess return for day -3; this result shows, investment news has disclosed before
information publishing. Nevertheless, talk invest in Taiwan, announce day not notable
abnormality remunerates, investment announcement has positively abnormal return for days
-14 and -10. These results show, meeting produce this result of reason is because invest news
early in news release leak out, investment message has disclosed before information
publishing that is very serious especially in Taiwan.

However, this research shows not all momentous investment announcement event can obtain
excess return. Therefore, listed corporation faces grave investment announcement, investors
need to appraise the content of investment affairs carefully, select a event that can increase
company value and acquire love by, general investor, we aim at investment announcement
type whose the best investment time point is also dissimilar. This paper suggests that investor
should refer the above-mentioned to proced investment, such can obtain higher investment
return.



                                      REFERENCES

Borde, S. F., Whyte, A. M., Wiant, K. J. & Hoffman, L. L. 1998. New Evidence on Factors
         that Influence the Wealth Effects of International Joint Ventures. Journal of
         Multinational Financial Management, 8(1), 63-77.

 Cestine, G.. & White, L. 2003. Anticompetitive Financial Ntracting: The Design of Financial
        Claims. Journal of Financial, 58(5), 2109-2141.

Chen, H., Hu, M.Y. & Shieh, J. C. P. 1991. The Wealth Effect of International Joint Ventures:
       The Case of U.S. Investment in China. Financial Management, 20(4), 31-41.

Chung, I.Y., Koford, K. J. & Lee, I. 1993. Stock Market Views of Corporate Multinationalism:
      Some Evidince from Announcement of International Joint Ventures. Quarterly Review
      of Economics and Finance, 33(3), 275-293.

Chen, S. S., Ho, K. W., Lee, C. F. & Yeo, G. H. H. 2000. Investment opportunities, free cash
       flow, and market reaction to international joint ventures. Journal of Banking and
       Finance, 24(11), 1747-1765.

Crutchley, C. E., Guo, E. & Hansen, R. S. 1991. Stockholder benefits from Japanese-U.S. joint
       ventures. Financial Management, 20(4), 22-30.

Doukas, J. & Tralvos, N. G. 1988. The effect of corporate multinationalism on shareholders’
      wealth: Evidence from international acquisitions. Journal of Finance. 43(5), 1161-1175.

Duggal, R., 1995. Agency cost and firm value: Further evidence from bidding firms.
      International Journal of Finance, 7(2), 1183-1194.

Fama, E. F., L. Fisher, M. C. Jensen & Roll, R. 1969. The Adjustment of Stock Prices to New
      Information. International Economic Review, 10(1), 1-21.

Finnerty, J. E., Owers, J. E. & Rogers, R. C. 1986. The valuation impact of joint venturers.
       Management International Revirw, 26(4), 14-26.

Franks, J. R. & Harris, R. S. 1989. Shareholder wealth effects of corporate takeovers: The UK
       experience 1955-1985. Journal of Financial Economics, 23(2), 225-249.

Gupta, A., McGowan, C. B., Misra, L. & Missirian, A. 1991. Gains from corporate
       multinationalism: Evidence from the China experience. Financial Review, 26(3),
       387-407.

King, B. F., 1966. Market and industry factors in stock price behavior. Journal of Business,
       39(1), 139-190.

Lee, I. & Wyatt, S. B. 1990. The effects of international joint ventures on shareholder wealth.
        Financial Review, 25(4), 641-649.

McConnell, J. & Nantell, T. J. 1985. Corporate combinations and common stock returns: The
     case of joint ventures. Journal of Finance, 40(2), 519-536.
Mathur, I. & Waheed, A. 1988. Overseas Expansion and shareholders’ wealth. Journal of
      Applied Business Research, 7(4), 48-55.

Sapienza, P. 2002. The Effects of Banking Mergers on Loan Contracts. Journal of Financial,
       57(1), 329-367.

Woolridge, J. R. & Snow, C. C. 1990. Stock market reaction to strategic investment decisions.
       Strategic Management Journal, 11(5), 353-363.

				
DOCUMENT INFO