AN EVALUATION OF THE IMPACT OF ELECTIONS ON THE MALAYSIAN STOCK MARKET

Abstract

In 18th, August 1993, an article published in Business Times: "Malaysian Stocks Tiptoe on Minefield of Politics" reported that UMNO elections have always had significant influence on the Kuala Lumpur Stock Exchange. The impact of political elections on the Malaysian stock market seems to be well recognised among the analysts of stockbroking firms and investors. This is evident as reports of similar nature are commonly seen on the newspapers and financial publications. The association of politics and stock market behaviour is always seen as inseparable in most of the capital markets in the world. Indeed, the stock market is always among the first to experience the impact of any political events. It is not difficult to cite some examples of political events that can potentially influence the stock market behaviour. The political election is one of such events. We choose the Malaysian stock market to be the candidate of our study mainly because the ruling parties are believed to own a large number of corporate businesses in the economy. Therefore, due to this intimate relationship between Malaysian politics and businesses, it is not surprising that people believe elections can have an impact on the Malaysian stock market. In view of the fact that no formal research has been conducted on this area, this thesis can be considered as an exploratory study on this topic. The primary objective of this thesis is to find out whether the UMNO and general elections have any significant impact on the Malaysian stock market. If such election effect can be recognised, then the further interest will be to identify the stock market behaviour during the election periods. In addressing these issues, this thesis provides some literature surveys on theories that are related to the behaviour of Malaysian stock market together with their empirical findings. However, greater emphasis will be placed on the implementation of these theories and the methodology in testing the impact of elections on the Malaysian securities market. It is found that, despite commonly held beliefs, the impact of elections is, in fact, not very significant.