Information and liquidity effects of government approved stock investments

Abstract

On April 1, 1986, the Singapore government announced that resident investors or Central Provident Fund (CPF) members could use their compulsory savings in the CPF to invest in approved equity stocks, unit trusts, and gold. This policy was implemented on May 1, 1986. However, the list of 70 approved trustee stocks in which CPF members may invest their funds was not released until May 3, 1986. This paper studies the economic impact of the event of releasing the list of 70 approved trustee stocks on the returns of both the approved and the non-approved stocks. Two possible impact are suggested, namely the information effect and the liquidity constraint effect. A multivariate regression model as well as a traditional event study time series model are used to test for the presence of the two effects. We test for both the partial information release on April 1, and also the full information release on May 3. The results show that significant information effect was not present. However, there is evidence that liquidity constraint did exist before May 1, 1986. The paper draws two implications which may be useful to policymakers. Firstly, the releasing of information in stages can effectively reduce informational impact on the stock market. Secondly, the existence of a liquidity constraint implies that compulsory saving schemes may cause investors, the savers, to hold more riskfree assets than they really desire.