The Effects of Market Strength, Information Asymmetry, and Industrial Characteristics on Malaysian Firms’ CAR During COVID-19 Pandemic

Abstract

Research Question: Would the COVID-19 pandemic induce investment opportunities or threats for companies listed at Bursa Malaysia? Motivation: This study investigates whether the market strength and information asymmetry experienced during a crisis and industrial characteristics have an impact on shareholders’ abnormal returns. Idea: The study uses market strength as measured by trading volume and information asymmetry as measured by bid-ask spread aims to suggest potential investment opportunities in different categories of industries for investors. Data: The study uses data of 620 companies listed on Bursa Malaysia, collected from 16 Mar 2020 to 9 Jun 2020. The data were divided into 3 event windows based on the government’s Movement Control Order (MCO) announcements. Method/ Tools: The event study method is used to calculate the cumulative abnormal returns (CAR) as the dependent variable. Multiple regression analysis with hierarchical model specifications were used in assessing the impact of the explanatory variables on the dependent variables. Findings: The findings suggest that during periods of uncertainty, firm characteristics such as larger and older firms are at a disadvantage compared to smaller and younger firms. In terms of market characteristics, the study shows that Increased trading volume has greater returns to investors. However, the bigger bid-ask spread associated with higher abnormal returns reflects the inefficiency of the stock market. This study also found that in the month following the announcement of the first MCO, the CAR of firms in vulnerable industries reduced by an extra 5% compared to firms who were not classified as vulnerable industry category. As the MCO prolonged, the CAR of firms in vulnerable industries fell by an extra 9.5% compared to other firms listed in Bursa Malaysia. The negative impact on the vulnerable industries shows glooming prospects of those firms. Contributions: Market reactions to pandemics and MCOs are negative especially at the beginning period. The strength of the market, information asymmetry, and industrial characteristics have a strong influence on the abnormal returns during the observed periods. The study also shows that historical financial track records are not good predictors of a firm’s prospects during this unprecedented COVID-19 pandemic.