THE STOCK MARKET VALUATION OF THE ANNOUNCEMENTS OF DIRECT INVESTMENTS IN CHINA

Abstract

Using standard event study methodology, this study examines the share price reaction of 83 listed Singapore firms which have undertaken 176 investment projects in China during the period from January 1990 to May 1995. The forms of foreign direct investment covered in this study include joint ventures, acquisitions, wholly-owned subsidiaries, purchase of land and other properties, and franchises. The event period assessed is ±30 days around the public announcement date of each investment project. We compute average excess return and cumulative average excess return across firms for each day of the event period under the framework of Market Model. Wilcoxon signed test and standardized t-test are used to test for significance of the results. We confirm that the announcements of investments in China have positive and significant impact on the market value of the participating firms and that the magnitude and significance level of the value created from investment activities vary across different investment strategies. The results can be summarized as follows. ( 1) Shareholders view joint ventures with controlling interest held by Singapore firms more positively than those with other ownership structure. (2) Firms that team up with Chinese partners have larger gains than those venturing into China alone. Firms forming joint ventures with other foreign partners suffer significant losses over the period around the announcements. (3) Shareholders gain positive excess returns regardless of the industries of investment. The firms investing in property projects gain higher cumulative excess returns than those investing in other industries. ( 4) The location of investment makes a difference. Investments in the provinces with dialect advantage, geographic proximity and cultural links between the two parities are associated with greater increase in value than investments in other places. (5) Shareholders do not appear to view the size of the initial investment as a significant factor affecting valuation. (6) Major macro-economic policy change in China has limited impact on the reactions of Singapore stock market. However, the magnitude of positive excess return is negatively related with the tight monetary policy.