Thailand Presented by Nattawoot Koowattanatianchai 1 - PowerPoint PPT Presentation

How the ASEAN Exchanges integration affects firms ’ position on the ASEAN Link and abnormal returns: evidence from Thailand Presented by Nattawoot Koowattanatianchai 1 http://www.bus.ku.ac.th

Authors Nattawoot Koowattanatianchai* Kasetsart Business School, Kasetsart University, Bangkok, Thailand Email: fbusnwk@ku.ac.th Tel: +66-87-539-3525; Fax: +66-2-579-0946 Kulkunya Prayarach Fiscal Policy Office, Ministry of Finance, Bangkok, Thailand Email: kulkunya@mof.go.th *Corresponding author at Kasetsart Business School, 50 Ngam Wong Wan Rd. Ladyao, Jatujak, Bangkok 10900, Thailand. Tel: +66-87-539-3525; fax: +66-2- 579-0946, email: fbusnwk@ku.ac.th 2 http://www.bus.ku.ac.th

Introduction • Under the ASEAN Economic Community (AEC) Blueprint, ASEAN will move towards achieving regional economic integration by 2015. • ASEAN countries have agreed on a development plan for financial and capital market integration, called ASEAN Exchanges, to harmonize ASEAN capital markets. 3 http://www.bus.ku.ac.th

Introduction Another key initiative is to streamline ASEAN access through security link by integrating seven exchanges of ASEAN countries, these being Bursa Malaysia, Hanoi Stock Exchange, Ho Chi Minh City Stock Exchange, Indonesia Stock Exchange, the Philippine Stock Exchange Inc., Singapore Exchange, and the Stock Exchange of Thailand (SET). 4 http://www.bus.ku.ac.th

Introduction • ASEAN Trading Link (ATL) is an inter-connected exchange hub platform or a network gateway that connects ASEAN exchange markets. In essence, the ASEAN Trading Link makes it as simple for investors to trade in other ASEAN capital markets as it is to trade in their own domestic market. • “ASEAN Stars” has been introduced so as to provide investors with an easily identifiable reference made up of the thirty most strongly performed stocks from each exchange, ranked in terms of market capitalization and liquidity. ASEAN Stars could be traded by local and international investors via the ATL. 5 http://www.bus.ku.ac.th

Introduction We look at the the impact of ASEAN Exchanges integration on the position of Thai firms in the ATL, which is one of economic cooperation initiatives developed by ASEAN member states in an attempt to realize the ASEAN Economic Community in 2015. 6 http://www.bus.ku.ac.th

ATL VS Cross-listing Similarity • Both aim to link securities from one country to another so as to obtain numerous benefits, such as lower cost of capital and greater liquidity, and allow investors to trade foreign securities conveniently. Main difference • Cross-listing is governed by the host country ’ s regulations and other legal frictions (e.g., taxes and financial statement standards), while having a position on the ATL is not. 7 http://www.bus.ku.ac.th

Hypotheses H1: Stronger capital market integration leads to higher linked probability. • Investors are expected to adopt a regional investment policy; that is, they will take into account information from both domestic and other regional markets when making investment decisions. • Investors will have more incentive to spread their investments across a high-quality portfolio of ASEAN companies with highly different risk and reward profiles. To take advantage of these expected behavioral changes, firms will attempt to link their shares to other regional markets, in addition to their own domestic market, to increase their ability to raise funds in the region of linked stock markets. 8 http://www.bus.ku.ac.th

Hypotheses H2: Joining the ATL results in fewer abnormal returns. • Cross-listed securities are likely to be traded by price incentive based public information, leading to low or no abnormal returns (Korezak and Lasfer, 2008) . • Cross-listing in overseas capital markets helps to reduce market segmentation (Foerster and Karolyi, 1999; Miller, 1999; Wang et al. , 2008). Increasing market integration or reducing market segmentation (i.e., separate stock markets move together with high correlation) reduces the benefits from portfolio diversification across countries (Click and Plummer, 2005; Janor et al. , 2007; Karim and Karim, 2012). • Markets with homogenous products produced and purchased by many buyers and sellers would earn a normal profit. This also pertains to equity markets, implying that a negative relation between expected equity ’ s returns and industry competitive position exists (Lyandres and Watanabe, 2011) 9 http://www.bus.ku.ac.th

Hypotheses H3: The linkage and announcement effects of joining the ASEAN Link are not statistically significant. • Previous empirical results pertaining to cross-listing phenomenon have been ambiguous. However, Wang et al. (2008) found no listing effects using sampled companies in Thailand that cross-list on the US stock market since these cross-listed firms concentrate on certain exchanges and the return patterns of these companies affect the returns patterns of these exchanges. 10 http://www.bus.ku.ac.th

Methodology: Two-stage regression system Stage 1: cross-sectional probit regression model 11 http://www.bus.ku.ac.th

Methodology: Two-stage regression system Stage 2: VAR model 12 http://www.bus.ku.ac.th

Variables Pr(TL)/PROBTL The probability that company has a position on the ASEAN Link CTSAR The cumulative total standardized abnormal return TL A binary response variable that equals to one for the linked companies, and zero otherwise. PE price-earnings ratio ROE Return on equity OC ownership concentration AEC ASEAN Economic Cooperation OIL Oil price INT Interest rate FX Foreign exchange rate 13 http://www.bus.ku.ac.th

Data Sampled firms • The first group consists of 30 Thai companies that have linked their shares on the ASEAN Link gateway. The second group contains 30 Thai companies that have not linked their shares on the ASEAN Link gateway. Variables • Daily return data on each sampled stock was collected during the event study period. • Daily data on financial and economic variables that constitute independent variables in our two-stage regression system were retrieved from several sources; for instance, the Computer Enterprise and Investigations Conference (CEIC), Reuters, DATASTREAM, and other official websites. Daily data on CTSAR and AEC must be computed using a particular methodology 14 http://www.bus.ku.ac.th

Computation of CTSAR Seiler’s (2004) methodology • The event period is 15 trading days before the first trading day through 15 trading days after the first trading day (-15, 15) in order to eliminate the impact that is not caused by factors influencing the overall market, and to cover unintended effects owing to leakage of news and investors’ trading delays. The first public announcement of the first trading day is also included in this event window in order to investigate the announcement effect. 15 http://www.bus.ku.ac.th

Computation of CTSAR Seiler’s (2004) methodology 16 http://www.bus.ku.ac.th

Computation of AEC Cross-sectional standard deviation of country index returns around a benchmark index (Solnik and Roulet, 2000; Adjaoute and Danthine, 2004) 17 http://www.bus.ku.ac.th

Descriptive statistics of the variables in stage 1 18 http://www.bus.ku.ac.th

Probit model marginal effects 19 http://www.bus.ku.ac.th

Probit model marginal effects H1 is supported by a significant negative marginal effect of AEC throughout the event period. • Thai securities that are highly integrated with foreign securities competing in the same industrial sector in the ASEAN region (or low standard deviation) are about 0.7 to 4.4 percent more likely to have a position on the ATL. PE is not always positive and not significant. • Securities are placed on the ATL even when their expected future earnings are not high. This implies that increasing the ability to raise more capital to cope with expected growth in future earnings is one of many reasons that firms earn from linking. 20 http://www.bus.ku.ac.th

Probit model marginal effects ROE has a statistically significant effect on the linked probability for 8 days during the event period. • Thai securities with high ROE are about 0.4 to 0.6 percent more likely to be placed on the ATL. Our findings mean that higher- quality firms are more likely to link. OC is not always positive and not significant. • The theory espoused by Abdallah and Goergen (2008) and Ayyagari and Doidge (2010); that is, firms with a high level of controlling shareholders can enjoy many benefits from cross-listing. A different case is found in the context of ATL. 21 http://www.bus.ku.ac.th

Probit model marginal effects The mean predicted probability of linking lies between 49.3 to 51.4 percent during the event window. • This implies that our selected independent variables influence the likelihood that Thai firms will have the position on the ASEAN Link by approximately 49.3 to 51.4 percent. The correctively predicted test demonstrates that our probit model is well justified in predicting the value of a binary model outcome, with the percentage of correctly predicted values being higher than 68 percent for every regression during the event window. 22 http://www.bus.ku.ac.th

Descriptive statistics of the variables in stage 2 23 http://www.bus.ku.ac.th