INVESTING IN AN INVESTING IN AN EMERGING MARKET: EMERGING MARKET:

EVIDENCE FROM US FIRMS EVIDENCE FROM US FIRMS INVESTING IN INDIAINVESTING IN INDIA

Shavin Malhotra Shavin Malhotra

& Nisha Malhotra& Nisha Malhotra

ObjectiveObjective

• Does news of foreign direct Does news of foreign direct investment in India have any impact investment in India have any impact on shareholder’s wealth (in term of on shareholder’s wealth (in term of stock prices)?stock prices)?

• Does the investing firm’s stock price Does the investing firm’s stock price reaction, to the news of investment, reaction, to the news of investment, varies by firm level characteristics?varies by firm level characteristics?

Some of the Earlier ResearchSome of the Earlier Research

Mock and Yeung (1992) Mock and Yeung (1992) Use event study to test for internalization theory. Use event study to test for internalization theory.

They look for relation between stock price They look for relation between stock price reaction and indicators of presence of acquirer reaction and indicators of presence of acquirer intangible assets (technology, R&D..)intangible assets (technology, R&D..)

Lang and Ofek (1995)Lang and Ofek (1995) US investment in Eastern EuropeUS investment in Eastern Europe Chen et al. (2001)Chen et al. (2001) Taiwanese investment in China mainlandTaiwanese investment in China mainland Chen et all (2000)Chen et all (2000) Foreign investment by Singapore firmsForeign investment by Singapore firms

Event Study Event Study

An event study is used to examine the An event study is used to examine the reaction of investors to positive or reaction of investors to positive or negative news (also called events). negative news (also called events).

A simple event study involves the following A simple event study involves the following steps: steps: • Event of interest (event window) Event of interest (event window) • Selection of firmsSelection of firms• Predicting "normal" return during the event window in Predicting "normal" return during the event window in

the absence of the event the absence of the event • Abnormal Return=Actual Return-Predicted ReturnAbnormal Return=Actual Return-Predicted Return• Estimating Cumulative Abnormal Return for the event Estimating Cumulative Abnormal Return for the event

window.window.• Testing whether the Cumulative Abnormal return is Testing whether the Cumulative Abnormal return is

statistically different from zero. statistically different from zero.

Event Study Event Study Selection of FirmsSelection of Firms

US Firms Investing in INDIAUS Firms Investing in INDIA

'Lexis Nexis Academic' database for the financial 'Lexis Nexis Academic' database for the financial year 2000 year 2000

• Lexis Nexis Academic Database and the Business and Lexis Nexis Academic Database and the Business and Company Resource Center of Gale Group Database. Company Resource Center of Gale Group Database.

Centre for Research on Security Prices (CRSP) Centre for Research on Security Prices (CRSP) databasedatabase(AMEX, NYSE, NASDAQ)(AMEX, NYSE, NASDAQ)

Event StudyEvent Study Standard market model to predict Normal ReturnsStandard market model to predict Normal Returns

itR is firm i's return at date t

it

NT

tninntitmtiiit eAEWeRR

1

itR is firm i's return at date t;

mtR is the return of the value weighted NYSE/AMEX/NASDAQ index at date t;

ite is a serially uncorrelated error term with mean 0 and constant

variance 2i for stock i.

ntEW is a dummy variable that takes the value 1 for the n th day of the event window and 0 otherwise,

i i , and inA are additional parameters to be estimated. The above equation is estimated using ordinary least squares.

Event Study Event Study

t=0

Estimation Period (365 days)

Event Window (-5, 5)

t= -396

t= -31

Event StudyEvent Study

Standard market model to predict Abnormal ReturnsStandard market model to predict Abnormal Returns

The coefficient of the dummy variable (EW) is the abnormal return

At the Firm level, we find 14 firms out of 36 firms in our sample experience a significant change in their stock prices

)ˆˆ(ˆ mtiiitit RRA

Table 1: AR at the firm levelTable 1: AR at the firm levelAnnouncement US firms investing in India Event Window (0,0) Z statistics

4/4/2000 SUN MICROSYSTEMS 5.46% 1.69*

6/15/2000 SUN MICROSYSTEMS 1.88% 0.57

9/14/2000 MICROSOFT CORP -4.06% -1.61$

12/13/2000 HONEYWELL INTERNA 0.44% 0.14

8/31/2000 DELL COMPUTER COR 7.84% 2.42**

11/23/2000 GENERAL ELECTRIC 0.22% 0.12

6/16/2000 GENERAL MOTORS CO -3.35% -1.52$

12/28/2000 GENERAL MOTORS CO -3.11% -1.33$

3/21/2000 ENRON CORP INC S 4.80% 1.70*

3/29/2000 WHIRLPOOL CORP R 6.09% 2.43**

2/22/2000 COMPUTER ASSOCIAT -2.31% -0.72

5/12/2000 COMPUTER ASSOCIAT -4.45% -1.45$

8/17/2000 COMPUTER ASSOCIAT 2.52% 0.64

11/27/2000 SHELL TRANSPORT & 1.12% 0.56

12/19/2000 HEWLETT PACKARD C 3.21% 1.02

4/18/2000 MCDONALDS CORP ES -5.52% -2.47**

3/29/2000 CHASE MANHATTAN C -1.77% -0.68

3/16/2000 INTEL CORP N RES 1.84% 0.66

6/13/2000 INTEL CORP N RES 4.73% 1.60$

5/18/2000 COMPAQ COMPUTER C -1.45% -0.43

8/11/2000 COMPAQ COMPUTER C -0.51% -0.15

3/14/2000 NEWS CORP LTD O L -0.90% -0.4

4/13/2000 SIMPSON INDUSTRIE 1.34% 0.52

6/13/2000 CISCO SYSTEMS INC 4.04% 1.52$

10/19/2000 CISCO SYSTEMS INC 6.89% 2.47**

9/26/2000 SITEL CORP ING CO -34.09% -5.81***

12/20/2000 SITEL CORP ING CO 3.70% 0.59

6/13/2000 LUCENT TECHNOLOGI 0.15% 0.05

9/25/2000 LUCENT TECHNOLOGI -2.67% -0.84

4/19/2000 LORAL SPACE & COM -3.50% -1.01

4/19/2000 BROADVISION INC O -9.18% -1.44$

5/8/2000 CRITICAL PATH INC 1.09% 0.15

9/26/2000 JUPITER MEDIA MET -7.23% -1.16

4/3/2000 T D WATERHOUSE GR 2.91% 0.7

11/1/2000 UNITED PARCEL S B -1.74% -0.74

10/3/2000 SOFTWARE TECHNOLO -4.29% -0.53

SECONDARY REGRESSIONSECONDARY REGRESSIONOrdinary Least SquareOrdinary Least Square

Regressing Abnormal Returns onRegressing Abnormal Returns on• ConstantConstant• Log of Total Assets Log of Total Assets • Research and Development Research and Development • Cash Flow Cash Flow • Industries DummiesIndustries Dummies

SIC:737 SIC:357 SIC:621 SIC:737 SIC:357 SIC:621 

SECONDARY REGRESSIONSECONDARY REGRESSION Abnormal Returns Abnormal Return

Log of Total Assets 0.00006

  (2.57)**

Research and Development 0.00022

  (1.80)*

Cash Flow -0.0002

  -1.65

SIC:737 0.00002

  -0.2

SIC:357 0.00014

  -1.19

SIC:621 0.00078

  (2.21)**

Constant -0.00059

  (2.72)**

 

Conclusion and Conclusion and Future ResearchFuture Research

Investing in India is a noteworthy event for Investing in India is a noteworthy event for the US firms.the US firms.

The benefits are positive and higher for The benefits are positive and higher for bigger firms, and firms with higher level of bigger firms, and firms with higher level of R&D investment.R&D investment.Expand the sample size to include more Expand the sample size to include more

cases with higher level of investmentcases with higher level of investmentdistinguish between first time investment distinguish between first time investment

and sequential investments.and sequential investments.Account for Multinationals already present Account for Multinationals already present

in target country show insignificant results.in target country show insignificant results.