Hsien-wen Liao PhD. Candidate National Chengchi University Yuanchen Chang Department of Finance National Chengchi University News Effects on the Valuation of Closed-end Country Funds: Evidence around the Asian Financial Crisis Period

2004/12/16NCCU2/23 Content Introduction Related literatures Data and methodology Empirical results Concluding remark

2004/12/16NTTU3/23  To resolve how news reports affect investors’ sentiment around the Asian financial crisis.  Concerning categorized news reports, to reveal how investors react to those news reports.  To resolve whether news effects have boundaries around financial crisis. Introduction

2004/12/16NTTU4/23 The effects of news arrivals on the valuation of asset prices Mitchell and Mulherin (1994), Berry and Howe (1994): Significant relationship is found between information arrivals and trading volumes. Chan and Wei (1996): Political issues on the handover of Hong Kong show positive impact on return. Chan, Chui and Kwok (2001): Economic news have distinctive impacts on trading when comparing with political news. (Investors’ perceptual biases) Related literatures

2004/12/16NTTU5/23 Closed-end fund and investors’ reactions to news arrivals Lee, Shleifer and Thaler (1990), Dimson and Minio- Kozerski (1999): Shares of closed-end funds trade at an average discount. (market friction) Lee et al. (1991): Discounts are a proxy for changes of individual investors’ sentiment. Burch, Emery and Fuerst (2003): Country fund discounts worsened dramatically following the 9-11 attack and then recovered gradually alongside the broader market. (Investors’ sentiment) Related literature (cont.)

2004/12/16NTTU6/23  Funds: Six Asian country funds listed on NYSE: Indonesia Fund, Korea Fund, Malaysia Fund, First Philippine Fund, Taiwan Fund, Thailand Fund.  Data source: Bloomberg Data and methodology

2004/12/16NTTU7/23  Sample period: Jan to Dec (Except for Indonesia Fund, its sample period is from Jan to Nov ) Sub-periods: Before-and-During Crisis: Jan – Dec Post Crisis: Jan – Dec (Except for Indonesia Fund) Data and methodology (cont.)

2004/12/16NTTU8/23  News events: Data source: LexisNexis Academic Culling rule: (Klibanoff et al., 1998) 1. Country names appear on the headline of the front page of The New York Times. 2. News reports contain more than 500 words. Culling results: 64 salient news, about 3% of all relative news. Data and methodology (cont.)

2004/12/16NTTU9/23  Categorized news: 1. Political news, economic news and general news. 2. Positive-tone news, neutral-tone news and negative- tone news. Illustrations : “Indonesia agrees to IMF’s tough medicine” “Chinese, In a move to alarm Taiwan, fires test missiles” Data and methodology (cont.)

2004/12/16NTTU10/23  Research methodology 1. OLS for individual funds. 2. Panel data (random effect) with weekly dummy variables. Before-and-During Crisis: 203 weekly dummy variables. Post Crisis: 149 weekly dummy variables. Data and methodology (cont.)

2004/12/16NTTU11/23 Empirical results 1. Three funds show at average premium and the others show at average discount. 2. Average magnitude of fund premium in the sample with news reports > that of fund premium in the full sample. Table 1

2004/12/16NTTU12/23 In news weeks, FSPs react more. Empirical results- summary statistics Table 2

2004/12/16NTTU13/23 Empirical results- FSP’s reaction on the changes of NAV 1. Panel data: ◆ FSP underreacts to NAV. ◆ The incremental effect is small in the lagged NAV. ◆ Discount can predict FSP. 2. Individual fund: Korea Fund, Taiwan Fun and Philippine Fund show less underreact. Table 3

2004/12/16NTTU14/23 Empirical results- News effects on the underreaction of FSP 1. Panel data: ◆ Significant news effect to FSPs. ◆ Positive coefficients for News×R t nav indicate that the underreaction is alleviated. Table 4 (panel data)

2004/12/16NTTU15/23 Empirical results- News effects on the underreaction of FSP (cont.) 2. Individual fund: ◆ Indonesia Fund and Korea Fund show significant news effects. ◆ Negative coefficients of News×R t nav indicate FSPs react less to the changes of NAVs in news weeks. Table 4 (individual funds)

2004/12/16NTTU16/23 Empirical results- news effects around the Asian financial crisis ◆ Significant news effects. ◆ Negative coefficients of News×R t nav indicate FSPs more underreact to NAVs in the news weeks. ◆ Insignificant news effects. ◆ Significantly and positively incremental news effects. ◆ The above two results indicate that in weeks with salient news reports the underreaction of FSP to NAV is significantly alleviated. Table 5 (panel data)

2004/12/16NTTU17/23 Empirical results- news effects around the Asian financial crisis (cont.) ◆ Significant news effects are shown on Indonesia Fund and Korea Fund. ◆ Particularly, Korea Fund shows significantly and negatively incremental news effect. ◆ All funds show insignificant news effects. ◆ Korea Fund shows significantly and negatively incremental news effect. Table 5 (individual funds)

2004/12/16NTTU18/23 To details Empirical results- Categorized news effects for full sample period Table 6

2004/12/16NTTU19/23 To detail Empirical results- categorized news effects around the Asian financial crisis Table 7

2004/12/16NTTU20/23 Implications:  During the crisis period, positive news is enhanced and perceived as news better than the news itself.  During the crisis period, the crisis itself is the lower bound for negative news. Empirical results- implications

2004/12/16NTTU21/23  Consistent with Klibanoff (1998), FSPs underreact to the changes of NAVs in regular weeks.  In weeks with salient news, the results are consistent with the hypothesis that news events lead individual investors to react more quickly.  Economic news affect individual investors’ reaction more than other categories of news in our sample period. Concluding remark

2004/12/16NTTU22/23  Salient news do play a role in the magnitude of investors’ reaction to changes in fundamental value.  Financial crisis itself is the lower bound for negative news. Concluding remark (cont.)

2004/12/16NTTU23/23 The end

2004/12/16NTTU24/23 ◆ Economic news is significant for both with and without weekly dummy variables. ◆ Positive tone news is significant for both with and without weekly dummy variables. ◆ Negative tone news is significant at 10% level for without weekly dummy variables. ◆ Economic news with positive tone is significant for both with and without weekly dummy variables. ◆ Economic news with negative tone is significant for without weekly dummy variables. Back Empirical results- Categorized news effects for full sample period Table 6

2004/12/16NTTU25/23 Empirical results- categorized news effects around the Asian financial crisis ◆ Significant effect for economic news. ◆ Significant effect for positive tone news. ◆ Significant effect for political news with positive tone at 10% level. ◆ Significant effect for economic news with positive tone. ◆ Significant effect for economic news. ◆ Significant effect for negative tone news at 10% level. ◆ Significant effect for economic news with negative tone at 10% level. Back Table 7