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EFFECT OF NATURAL CATASTROPHES ON STOCK PRICES: EVIDENCE FROM INDONESIA, MALAYSIA AND THAILAND
.' KhoGeokHui
Bachelor of Finance (Honours) 2012
Pusat Kbidmat Maklumllt Akademik UNlVERSlTl MALAVS ' W.
EFFECT OF NATURAL CATASTROPHES ON STOCK PRICES: EVIDENCE FROM INDONESIA, MALAYSIA AND THAILAND
P.KHIDMAT MAKLUMAT AKADEMIK
111111111 fli'filllllllill 1000245020
KHO GEOKHUI
This project is submitted in partial fulfillment of the requirements for the degree of Bachelor of Finance with Honours
Faculty of Economics and Business UNlVERSITI MALAYSIA SARA W AK
2012
Statement of Originality
The work described in this Final Year Project, entitled "EFFECT OF NATURAL CATASTROPHES ON STOCK PRICES: EVIDENCE FROM INDONESIA, MALAYSIA AND THAILAND"
is to the best of the author's knowledge that of the author except where due reference is made.
~5.o~ . ~OI:L
Date submitted Kho Geok Hui
23752
ABSTRACT
EFFECT OF NATURAL CATASTROPHES ON STOCK PRICES: EVIDENCE FROM INDONESIA, MALAYSIA AND THAILAND
By
Kho Geok Hui
This study examines the effect of natural catastrophes on the stock returns of
the firms listed in Indonesia, Malaysia, and Thailand stock exchange and operating
in automobile and parts, construction and material, food producers, technology
hardware and equipment, and travel"and leisure industry. This study only examines
the effect of natural catastrophes on the stock returns in the post-event. An event
study methodology has been employ in this study by adopted CAPM to estimate the
AR and CAAR for the event period. The result shows that, the effect of natural
catastrophes on stock prices is negative to the industries in Indonesia and Thailand.
Only industries in Malaysia had the positive to the natural catastrophes on stock •
prices. Overall, the finding indicates that natural catastrophes have effect to the stock
prices. In addition, the results seemed to indicate that the market in Malaysia is more
or less efficient except for few days and in Indonesia and Thailand market are
somewhat inefficient.
I ABSTRAK
KESAN BENCANA ALAM KEPADA HARGA SAHAM: KETERANGAN DARI INDONESIA, MALAYSIA DAN THAILAND
Oleh
Kho Geok Hui
Kajian ini mengkaji kesan bencana alam pada pulangan saham finna yang
disenaraikan di Indonesia, Malaysia dan Thailand bursa saham yang beroperasi
dalam kereta dan bahan pergantian, pembinaan dan bahan, pengeluar makanan,
pelengkapan dan peralatan teknolog} dan pelancongan dan peranginan industri.
Kajian ini hanya mengkaji kesan bencana alam pada pulangan saham selepas
bencana alamo Kaedah kajian yang digunakan adalah kajian peristiwa dengan
menggunakan CAPM untuk menganggarkan AR dan CAAR untuk tempoh kajian
yang dikajikan. Keputusan kajian menunjukkan bahawa, kesan bencana alam telah
menyebabkan harga saham menunjukkan negatif daripada industri di Indonesia dan
Thailand. Hanya industri di Malaysia memponyai positif daripada bencana alam
pada harga saham. Secara keseluruhannya, kajian ini menunjukkan bahawa bencana
alam membawa kesan kepada harga saham. Di samping itu, keputusan kajian ini
menunjukkan bahawa kecekapan wujud dalam pasaran Malaysia kecuali beberapa
hari itu dan agak ketidakcekapan wujub di pasaran Indonesia dan Thailand.
ACKNOWLEDGEMENT
First and foremost, I would like to thank my supervisor Professor Dr. Abu
Hassan bin Md Isa, whom had given me a great deal of advice, support,
encouragement, comment and criticisms to guide me finish this Final Year Project.
Without his constructive guidance and thoughtful comments at various stages of my
research, I would be much difficulty in doing this study.
In addition, I would like to thank my family members, course mate and
friends for their support, encouragement, and caring. Without them, it will be
impossible for me to finish this research. Besides that, directly or indirectly valuable
suggestion offered by my friends and course mate are greatly appreciated as well.
Last, I would like to thank all the UNIMAS Faculty of Economics and
Business (FEB) lecturers and administration staff who had helped me direct or
indirect to success this project.
Pusat Khidmat Maklumat Akademik UNIVERSlTI MALAYSIA SARAWAK
TABLE OF CONTENTS
Page
LIST OF TABLES X-Xl
LIST OF FIGURES Xll
CHAPTER 1: INTRODUCTION 1-13
1.0 Introduction ....................... . . . .............. . .. '" ... .. . . ....... .
1.1 Natural Catastrophes ......... . ........... .. ................. . ...... ... 6
1.2 Stock Market . . . . .................... . ............. . , .. . ... . .. ... . ... ... 6
1.2.1 Indonesia Stock Exchange (IDX) .. ............. . ........... 6
1.2.2 Bursa Malaysia (KLSE) . .. . . . ... . . .......... . .. .. ........ . .. . 7
1.2.3 Stock Exchange of Thailand (SET) ..... . .......... .. .. . ..... 8
1.3 Problem Statement .. .......... .... ... . ....... . ........ .. . . ............. . 9
1.4 Objective of the Study .... ... ........... . ........... .. ............ . .. .. 11
1.4.1 General Objective ......... .. ........... .. ...... .. ... .. ........ 11
1.4.2 Specific Objectives ... . ............ ... ........... . ........... .. 11
1.5 Significance of the Study .. . ........ . ...... , ...................... .. .. 12
1.6 Scope of the Study ...... . ............ ... ....................... . .. . .... 13
1.7 Conclusion .............................................................. 13
.,
CHAPTER 2: LITERATURE REVIEW 14-28. 2.0 Introduction ......... ... ..................................... ... ........ 14
2.1 Natural Catastrophes ......... . ........... .. ........... . . . ......... .. ... 14
2.1.1 Natural Catastrophes and Stock Prices .......... .. ........ 14
2.1.2 Natural Catastrophes and Stock Market ...... .. .......... .17
2.1.3 Natural Catastrophes and Economic Impact. ......... . .... 20
Vll
2.2 Man-made Disasters ............ . . . ........ ... ........ . ............. .22
2.2.1 Man-made Disasters and Stock Prices ............ . . . . ... .. 22
2.2.2 Man-made Disasters and Stock Market .. ..................25
2.3 Catastrophes . .............. ..................... . ........... . . . ... . .... 27
2.3.1 Catastrophes and Stock Prices ............................ .. .. 27
2.3.2 Catastrophes and Stock Market .... .. ................ .. ...... 27
2.4 Conclusion ... . ...... . .... , ............ . ................... . .. . ...........28
CHAPTER 3: RESEARCH METHODOLOGY 29-39
3.0 Introduction ....... . ..... . ......... .. ...................... .. ............29
3.1 Theoretical Framework ....... . ............ ... ..... . .......... ..... ....29
3.2 Hypotheses of the Study .. ........ .. ...................................31
3.3 Sampling Design ....... . .. .. . . .... .. ........ . ... . .......... . ..... ... ... . 32
3.4 Sources of Data .. . . . ......... .. . . .. ... ............... .... .......... .. ...34 .
3.5 Methodology ... . ........ ..... ............... .. .. ..... ......... ... .......35
3.6 Conclusion .. . .... .. ................ ... ......... .. ...... . ... . .............39
CHAPTER 4: EMPIRICAL RESULT AND DISCUSSIONS 40-76
4.0 Introduction...... .. ... .. ................................................ .40
4.1 EmpiIOical Results ............. . ......... . .. .... ......... . ..... . . . ...... .40
4.1 .1 Indonesia ... ......... ... ....... .. .. . .......... . ... . . . ..... .. ....... 41
4.1.1.1 Automobile and Parts Industry ........ .. .......... .41
4.1.1.2 Construction and Material Industry .. .......... .. ..43
4.1.1.3 Food Producers Industry .................... .... .... 45
4.1.1.4 Technology Hardware and Equipment Industry .. 47
4.1.1.5 Travel and Leisure ....................................49
Vlll
4.1.2 Malaysia..... . . .. . . ........ . ........................... . ... . ........51
4.1.2.1 Automobile and Parts Industry ........ . . .. ......... 51
" 4.1.2.2 Construction and Material Industry ..... . ..........53
4.1.2.3 Food Producers Industry ................. . ..........55
4.1.2.4 Technology Hardware and Equipment Industry ..57
4.1.2.5 Travel and Leisure ................... . .. . .. .... .. ... ..59
4.1.3 Thailand ................. . ............................... . . . ... ... . . 61
4.1.3.1 Automobile and Parts Industry ......... ... ..... . ... 61
4.1.3.2 Construction and Material Industry .... . .......... 64
4.1.3 .3 Food Producers Industry .. .. .............. .. ..... . ... 67
4.1.3.4 Technology Hardware and Equipment Industry ..70
4.1.3.5 Travel and Leisure .. . ... .. .... . ........... . ..... . ..... 73
4.2 Conclusion .................. . .... .. .. . . .... . . . . ... ... . . ... . . . .. . ........ 76
CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 77-82
5.0 Introduction .................... . ....... . .. . . . ...... . .... . . .. ............77
5.1 Summary of Finding ......... ... ... . .............. . .......... . .........77
5.2 Recommendation for Future Research .............................. 80
5.3 Policy Implication .................... . ................... . ............. 81
5.4 Limi.tation of the Study ........ .... .. ...... ..... . ......................82
REFERENCES 84- 87
APPENDIX
List of Sample from Indonesia, Malaysia and Thailand
IX
LIST OF TABLES
Table 1: Types of Natural Catastrophes from Developing Countries ....... . ..... 2
Table 2: Type of Natural Catastrophes, Event date, Event window and Event ...33 days (trading days) based on Indonesia, Malaysia and Thailand
Table 3: Types Number of firms from each Industry and Country ................ 34
Table 4: Market Response Reaction ofAutomobile and Parts Industry .......... 42 to the Tsunami in Indonesia
Table 5: Market Response Reaction of Construction and Material ...... . ......... 44 Industry to the Tsunami in Indonesia
the Tsunami in Indonesia
Equipment Industry to the Tsunami in Indonesia
the Tsunami in Indonesia
the Flood in Malaysia
Industry to the Flood in Malaysia
Table 6: Market Response Reaction of Food Producers Industry to ............... 46
Table 7: Market Response Reaction ofTechnology Hardware and ............... 48
Table 8: Market Response Reaction ofTravel and Leisure Industry to ........... 50
Table 9: Market Response Reaction ofAutomobile and Parts Industry to ....... 52
Table 10: Market Response Reaction of Construction and Material ............... 54
,i
Table 11: Market Response Reaction of Food Producers Industry ................ 56 to the Flood in Malaysia
Table 12: Market Response Reaction ofTechnology Hardware ................... 58 and Equipment Industry to the Flood in Malaysia
Table 13: Market Response Reaction ofTravel and Leisure Industry ............ 60 to the Flood in Malaysia
Table 14: Market Response Reaction of Automobile and Parts Industry ........ 62 to the Flood in Thailand
x
Table 15: Market Response Reaction of Construction and Material Industry ... 65 to the Flood in Thailand
Table 16: Market Response Reaction of Food Producers Industry to .~ ...........68 the Flood in Thailand
Table 17: Market Response Reaction ofTechnology Hardware and ..............71 Equipment Industry to the Flood in Thailand
Table 18: Market Response Reaction ofTravel and Leisure Industry ........ .... 74 to the Flood in Thailand
Table 19: Summary of the Effect of Natural Catastrophes to the Abnormal . ....78 Returns
Table 20: Summary of the Effect of Natural Catastrophes to the Cumulative ....78 Abnormal Returns
Table 21: Summary on Market Efficiency after the Event ......................... 80
Xl
LIST OF FIGURES
Figure 1: Theoretical Model of the Effect ofNatural Catastrophes ............ ... 30 on Stock Prices for Indonesia, Malaysia and Thailand
Figures 2: Estimation period and event window ..................................... 36
, \oJ ••
Xll
CHAPTER 1
INTRODUCTION
1.0 Introduction
In recent years, the natural catastrophes event happen frequently and
increasing. Natural catastrophes have huge impacts on human lives and environment,
there are such as floods, tsunami, earthquake, hurricane, tornado or volcanic eruption.
Public start concern to natural catastrophes because it happen continues and increase
harm to global economy. In 20 I 0, worldwide economic losses from natural
catastrophes and man-made disasters is USD 218 billion, there are triple more of
USD 68 billion in 2009 and increase 60% of USD 43 billion cost to the global
insurance industry than the previous year (Swiss Re, 2011).
On 11 March 2011, Japan hit by the most powerful earthquake in the history
with a 9.0 magnitude earthquake. From the event, Japan expected more than 100
billion of US dollars will loss in the financi<1l. This situation became worse when
nuclear crisis happen in the same time with the earthquake. Nuclear crisis happen in
Japan is the result from the powerful earthquake.
1
Japan and China are the countries frequently happens natural events and
disasters in Asian. Japan and China are the most important economy in the world
after United States. When a catastrophe happens in this two country, it will effect to
the other countries economy. This situation happen in China will bring most effect to
other because China is the largest exporter of raw material. If the supply of raw
material cannot be maintained, it will increase the price of the raw material. Due to
the problem, cost of the product will also increase.
When the two giant of the financial central of Asia will be affected by the
natural catastrophes event, it will also bring the effect to the developing countries.
Many of the corporate firm from United State and Japan had build up their
manufacturing on developing countries such as Indonesia, Thailand, Malaysia,
Vietnam and Philippine. These is because the there have low cost man power, high
technical and lower cost of material cost which will help the corporate firm to reduce
the cost.
Table 1: Types of Natural Catastrophes from Developing Countries
Country Type of Natural
Catastrophes Event date
Indonesia Tsunami 26.12.2004
Malaysia Flood 19.01.2006
Thailand Flood 10.10.2011
Source: Wikipedia
2
But recently, the phenomenon of natural catastrophes has also influence the
developing countries. On the end of July 2011, Thailand has affected by the worst
flooding in 50 years. This disaster as the world's fourth costliest disaster after the
2011 earthquake and tsunami in Japan, 1995 Kobe earthquake and Hurricane Katrina
in 2005 are estimate by The World Bank'. The flooding began around July 2011, and
continued into December 2011 with heavy monsoon rains and a series of tropical
storms. In this event, the total damages have reached 45 billion USD and more than
12.8 million of people are affected.
On the other hand, another disaster has happened on Malaysia. On 18
December 2006 to 13 January 2007, Malaysia has happen the worst floods in 30
years before on Johor due to the abnormal heavy rainfall from Tyhoon Utor. It has
cost billions of ringgit lose in the economy due to the lost in productivity, financial
10 ses and damaged of the infrastructure. In this event, there are at least of 118
people dead and 155 people missing.
Besides that, on 26 December 2004 a natural catastrophe had happen which
affected 12 countries, which is 2004 Indian Ocean earthquake. Indonesia is most
seriously affected and following by Sri Lanka, India and Thailand. This earthquake
happens on a magnitude 9.0 at the west coast of northern Sumatra, Indonesia. From
the event, more than 230,000 people are dead and millions of others are affected,
including the injured, missing or displaced.
3
From the phenomena, investors and researchers view event is a risk which is
a factor that influences the asset perfonnance. In this study, natural catastrophes are '"
the event risk refers to uncertainty that arise from risky events which can affect the
asset prices. When Japan hit by the most powerful earthquake on 31 March 2011,
stock markets seem have responded to the event. A finn perfonnance can seem from
it stock market return from the stock market.
Natural catastrophes effect on the finn perfonnance can be seem direct and
indirectly damage. Direct damage cause from a catastrophe which is widespread and
the result can be seemed immediately in the affected area. Nonnally the direct
damage is the infrastructures and facilities those in the affected area. The
infrastructures and facilities are important to the local people and the business
activities at the area. Infrastructures' and facilities those are banks, supennarket,
hospital, restaurant, station, port and other. When it damage, most probably will
direct damage the convenience of the local people and the business activities cannot
be continue. Beside that's, if manufactories and fanning area affect by the
catastrophes, these will disruption the supply chain to the enterprise.
,:
Indirect damage cause from a catastrophe which is also widespread, but the
different is the result cannot be seemed immediately. Indirect damage nonnally exist
item of cost. The indirect costs are the loss from production, emergency response,
relief and clean-up (Worthington & Valadkhani, 2004). The cost of the production is
4
Pusat Khidmat MakJumat AkadtruH.. UN1VERSm MALAYSIA SARAWAK
increase means that the cost of input is increasing and the firm needs more cost to
buy their input and may force them earn less.
There is growing number of literature that examined the natural catastrophes
or natural disasters event effect on the stock prices. For example, Shelor, Anderson
and Cross (1990) are the first study on the effect of natural catastrophes to the stock
prices. They had found there are statistically significant negative stock returns
affected most firms operating in the San Francisco area than those firm are not
located in that area when the natural disaster has happen. After that, it has continued
attracting the interest of academicians and researchers (Koerniadi, Krishnamurti, &
Tourani, 2011; Takao, Yoshizawa, Hsu & Yamasaki, 2011; Bolak & Suer, 2008).
There are more studies have produced for the man-made catastrophes than
natural catastrophes on stock prices. The study conducted by Cummins and Lewis
(2003) and Carter and Simkins (2004) in terrorist attack, Ferstl, Utz and Wimmer
(2011) for Japanese nuclear disaster, Kalra, Henderson and Raines (1995) Bhopal
disaster, Chen, Bin, and Chen (2005) the possible impact of various political and
Blancardyand Lagunaz (2010) chemical disaster.
In the context of the development countries, there are still lack of study in
investigated the effect of natural catastrophes on the stock prices. There is a study
from Koerniadi et al. (2011) which focus all the natural catastrophes in worldwide to
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the stock prices. Therefore, this paper plan to examine the reaction of the stock
prices on the developing country is affect by the natural catastrophes event. ,
1.1 Natural Catastrophes
Catastrophe is an event which happen extensive disaster and suddenly
(Dictionary. com, 2011). Catastrophe can also be described as a national economic
catastrophe or leading the world catastrophe. Catastrophe can be categories as
"natural catastrophe" and "man-made". According to Swiss Re (2011), natural forces
will cause a natural catastrophe event. This event normally will make a large number
of damage and losses which cover huge area. There are several types of natural
catastrophes includes floods, tsunami, earthquake, hurricane, tornado, volcanic
eruption and others.
1.2 Stock Market
1.2.1 Indonesia Stock Exchange (IDX)
The Indonesia Stock Exchange (IDX) or Indonesia Bursa Efek Indonesia
(BEl) is a stock exchange at Jakarta, Indonesia. Before 2007, it was known as
Jakarta Stock Exchange (JSX). After merger with Surabaya Stock Exchange (SSX)
on 2007 it name IDX. A combined market capitalization of $ 269.9 billion on 28
6
June 2010 and 341 listed companies is belonging to lOX. When it comes to 2011,
the number of issuers at lOX increases to 425 and the market capitalization was $400 "
billion.
On 1912, lOX starts operate under the Dutch colonial government and after
closures during World War I and World II it had re-opened in 1977. When it
reopened, the exchange was under the management of the newly created Capital
Market Executive Agency, under the Ministry of Finance. Beside the development of
the Indonesia's financial markets and the private sector, the trading activity and the
market capitalization of JSX is growing. This was highlighted by a major bull run in
1990. When it was on 13 July 1992, Jakarta Exchange Inc. was the ownership of the
exchange after privatized.
1.2.2 Bursa Malaysia (KLSE)
The Bursa Malaysia previously known as Kuala Lumpur Stock Exchange
(KLSE). On ,.} 930, a formal organization was set up to dealing with securities in
Malaya that is Singapore Stockbrokers Association. After that, there was change to
register as the Malayan Stockbrokers' Association on 1937.
On 1960, the Malayan Stock Exchange was formed and officially formed was
at 1964. When come to year 1973, the Stock Exchange of Malaysia and Singapore
7
was divided to Kuala Lumpur Stock Exchange Berhad (KLSEB) and the Stock
Exchange Singapore because of the currency interchange ability problems between
Malaysia and Singapore. On 14 December 1976, the Kuala Lumpur Stock Exchange
Berhad was taken over by the Kuala Lumpur Stock Exchange (KLSE) as a company
limited by guarantee. KLSE was renamed as Bursa Malaysia Berhad in 2004.
Bursa Malaysia consists of a Main Board, Second Board and the MESDAQ
which the market capitalization is MYR 700 billion (US$ 189 billion). Bursa
Malaysia was listed on the Main Board of Bursa Malaysia Securities Berhad with a
17% or RMO.50 premium over its retail price of RM3.00 on the date of 18 March
2005.
1.2.3 Stock Exchange of Thailand (SET)
The Stock Exchange of Thailand (SET) is the national stock exchange of
Thailand and located in Bangkok. 541 listed companies with a combined market
capitaiizatiofl of $ 280 billion on 31 Dece~ber 2007 are belonging to SET. SET
Index, SET50 Index and SETlOO Index are the indices of the stock exchange SET.
The modern Thai capital market developed in two stages. The first is
privately owned Bangkok Stock Exchange operated from 1962 to the early 1970s.
8
The National Economic and Social Development Plan (1967-1971) recognized the
Securities Exchange of Thailand to mobilize funds to support industrialization and .. economic development is the second stage. The plan was the country's first officially
sanctioned, supervised and regulated orderly securities market
1.3 Problem Statement
Nowadays, natural catastrophes occur regularly which is
event. We cannot estimate that, when it will happen and prevent it.
an unavoidable
Because of the
unknown and uncertainty, there is a risk to the firm who had operated their business
to maximum the assets and capital. According Shelor et al. (1990), this information
is important to the firm located on th~ disaster area or high risk area.
Due to the awareness that the stock prices will be influence by the natural
catastrophes event and all the relevant news can affect the market efficiency. The
study from Worthington and Valadkhani (2004) states that bushfires, cyclones and
earthquakes 'have effect on market returns. ,They also found the effect from the
natural disasters to the capital market is depending on the type and the size of natural
disasters and the market will rebound in short time. But, Wang (2011) found natural
disasters will not impact on Japanese stock return.
9
As more question arise from the event that, which particular firm have
speoific effect of the natural catastrophes. After an event has happen, there must
" have some firm has the higher loses or gain from the event. Bolak and Suer (2008)
examine the effect of Marmara earthquake on the stock prices of the firms operating
in the banking sector with the reason that the demand for cash will increase, which
will decrease the deposit of banks.
Besides that, the natural catastrophes not only occur on the develop countries
it often happen on developing countries too. Jayasuriya (2010) has study the direct
and indirect effects of the tsunami to the economics of the country. Low cost, low
man power price, lower costs of material which encourage the foreign investor go
into invest on developing countries. A problem has existed when the multinational
corporate and investor invest to the'country, how they are going to protect their
interest.
Most of the previous studies focus on the property-liability insurance
industry by Shelor et al. (1992) and impact of natural disasters on capital market in
Australia (Worthington & Valadkhani, 2004): Whereas there are numerous studies
examining the natural catastrophes, but there are still lacks of studies investigating
the natural catastrophes effect in across national stock prices and in developing
countries.
10
1.4 Objective of the Study
The objective of this study can divided into general objective and specific
objectives as follow:
1.4.1 General Objective
The general objective of this study is to examine the natural catastrophes effect
on the stock prices for Indonesia, Malaysia and Thailand.
1.4.2 Specific Objectives
1.4.2.1 To determine the relationship between natural catastrophes and stock
prices of various industries in the three countries.
1.4.2.2 ..Examine market efficiency during the event of catastrophes by
studying the stock return (post- event).
11
1.5 Significance of the Study
The significance of the study for this research is to help investors to reduce
their risk on the market and enrich awareness on the stock market. If natural
catastrophes effect on the stock prices, it evince that the market inefficiency and the
investor cannot gain abnormal rates of a return by predicting the stock prices.
This study also benefits those investors who want to invest on developing
countries. Natural catastrophes not only occur on the develop countries it often
happen on developing countries like Thailand, Vietnam, Indonesia, Cambodia, China
and so on. These developing countries are high potential market other that Europe
market to let the investors to gain profit.
On the other hand, this study may enrich awareness on the stock market. The
effect of natural catastrophes on stock market is important to the countries located at
special geographical or high risk area. So, hope from this study can provide and
improve the information about the effect of natpral catastrophes on stock return.
Moreover, this study is important to the policy maker. A policy maker can be
a decision in term of government or in business. The policy can describe as a
practice or rule to guide decisions and achieve the objective. Policy maker must
12