Stock Market Reaction to Political Regime Change in Malaysia

Abstract

Research Question: How does a change in the ruling party impact the value of actively traded stocks in Malaysia? Motivation: The 2018 general election results is a never seen before phenomenon that can be classified as a political risk that affects the value of actively traded stocks in the Malaysian stock market. Idea: This study aims to investigate the impact of a change in government on share price and length of time needed for market adjustment. Data: The sample is based on 656 listed stocks on 9th May 2018 which was the election date in Malaysia. Data is obtained from Thomson Reuters Datastream. Method/Tools: Event methodology is used to identify abnormal returns (AR) and cumulative average abnormal returns (CAAR) as a measure on the impact of the election on stock prices. AR is averaged across firms to minimize other event effects, thus providing a better measure of the effect of the announcement event. The CAARrepresent the average total effect of the event across all firms. Findings: This paper provide evidence that a significant political announcement such as election results which is followed by a government change would affect the value of actively traded stocks. The impact is found to be significantly positive CAAR on the selected event windows for both pre and post-event day. This study also finds 67 active trading days is insufficient for the market to recover from a political regime change as the stock market appears to be experiencing volatility during the observation period. Contributions: This study is different from other studies in two ways: (1) To our knowledge, there is no study that has yet to investigate the impact of a change in the ruling government on the Malaysian stock market; and (2) This study uses event methodology which would neatly capture specific political events such as dissolution of parliament, election results and delivery of 10 key promises by the newly elected ruling coalition and provide insight of not only the impact a change in ruling party but also immediate reforms made by the new government on the stock market