This paper examine on wealth effect of shareholders from the international investment announcements made by Malaysia Multinational Corporations (MNCs) listed at Kuala Lumpur Stock Exchange (KLSE). The project is using quantitative method (standard event-study methodology) and announcements in the year of 2002 are used. The result shows that international investment announcements create positive significant wealth effect for main board firms in KLSE. For second board firms however, the market does not react directly towards the foreign investment announcements. In short, unexpected cross border investment announcements do contain new relevant information and market does react on it. Market saturation theory also suggests that foreign investments may help firm to improve competitiveness and profitability. Besides, the larger capital size of main board firm makes the market to be more confident and optimistic on overseas investments announced by main board firms rather than second board.
Background of the Study The study focuses on the market's reaction towards international investment announcements made by Multinational Corporations (MNCs) in Malaysia. According to Eun & Resnick (2004), a multinational corporation (MNC) is a business organization incorporated in one country but has production and sales operations in at least one foreign country. Similarly, based on Franklin (1973), MNC is a business firm that consists of a parent company that produce and market in foreign countries; with the flow of products, services, capital, technology, management, and funds among them. As shown in many studies, the stock price reactions towards foreign investment announcements in developing market produced uncertain results. Some studies showed positive market reactions towards international investment announcements but some may not. For instance, Lummer and McConnell (1990) proved that US firms' foreign joint ventures have a positive return especially when the venture partner is a foreign firm as contrasted to a foreign government. Moreover, Ahmad Etebari (1993) stated that joint ventures between US firms and Eastern and Central European Countries yield a positive valuation effect for the participating US firms. Besides, there is a study that showed international acquisition provides abnormal positive returns to target shareholders (Ike Mathur and Nanda Raugan, 1992). However, some studies shows negative market reaction towards the announcements. Thomas H. S. & Ghassem H. (1990) indicated that there is a small magnitude of negative stock price reaction to foreign investment announcements. Similarly, Albert C. & Alireza T. R. (2000) tested on the wealth effects of international acquisitions using a sample of foreign acquisitions by Dutch firms during the period 1990 to 1996 and found weak evidence on wealth creation of the activities, especially for the acquisitions in the US. There must be some reasons that attract firms to go abroad. Alex O. W. (1982) discussed that the fundamental of international trade is the difference in cost of goods produced in different countries. Different natural resources (such as land and mineral), capital (technology), and labors will have different prices in various countries. Referring to Eun C. S. & Resnick B. G. (2004), firms can locate production in any regions in the world to maximize performance and raise funds in market where the cost of capital is the lowest. International investments also enable firms to diversify risks compared to only investing locally. More significantly, based on David Ricardo's On the Principles of Political Economy and Taxation which introduced the concept of comparative advantage and this concept further convinced firms to go abroad (Franklin R. R., 1994; Eun C. S. & Resnick B. G., 2004; Alex O. W., 1982). According to Ricardo, it is mutually beneficial for firms to produce and specialize in goods that they can produce most efficiently, with the least costs compared to other firms. Then, it is advisable for firms to trade goods among themselves, even if situated in different countries. For example, a firm in France produces wine most efficiently, whereas a firm in England produces textiles with the best efficiently. If they both specialize in their respective products and trade it with each other, the combined production of the two goods will be increased compared to if they choose to produce the products individually. Through international investment, MNCs can achieve economy of scale faster (Eun C. S. & Resnick B. G., 2004). First, it can be done by spreading the R & D expenditures and advertising costs over the global sales. Besides, firms can also pool their global purchasing power over the suppliers, thus enabling them to purchase raw material at lower prices. Technology can be used with minimal additional costs too. MNCs are also able to get cheaper labor compared with their parent company in certain countries. Nevertheless, there are also some arguments on the negative effects of firms' international investments. Madura (2000) discussed that managements might be unfamiliar to foreign cultures when they expand internationally. These culture barriers may offset the gains from the international expansion. Management needs to know and understand foreign cultures, for instance, Germans only discuss business dealings in the meeting room, but never during meals. Furthermore, Jensen (1986) said in his free cash flow theory that managers may sometimes be involved in over-investing in some unprofitable foreign ventures in order to expand firm's empire and obtain prestige. The investments will eventually shrink the value of the parent companies. In addition, MNCs are exposed to foreign exchange risk that they would not encounter in purely domestic transactions (Eun C. S. & Resnick B. G., 2004). For example in December 1994, the Mexico peso depreciates drastically against US dollar. Consequently, the price of US imported goods will increase in Mexico as it needs more pesos to buy $1 US dollar. Similarly for Asian currency crisis 1997, if a US firm with major export market like Indonesia, Malaysia, or Thailand, the same difficult situation will occur. Another drawback from international investment is the political risk involved (Eun C. S. & Resnick B. G., 2004). The risk arises from the changes in tax rules or inconsistency in policy implementations by foreign governments. For illustration, in 1992 Enron Development Corporation spent nearly $300 million on the project to build a largest power plant in India. However, it was then cancelled in 1995 by the politicians. This showed how difficult it is to maintain contracts and investments in foreign countries under the influence of politics.
Malaysian's MNCs Performance There are three forms of foreign investments: acquisitions and joint venture with existing companies in foreign countries, and opening new subsidiaries in foreign countries (Madura, 2000). To study the market reaction of Malaysian's MNCS on international investment, this study focuses on Kuala Lumpur Stock Exchange (KLSE), one of the fastest developing and largest rising securities market in the Asia Pacific rim (Annuar and Shamsher, 1992). A survey has been conducted by Bala (1999) on 436 firms (as at October 1997) listed on KLSE to recognize MNCs originating from Malaysia. Eventually, he discovered 207 firms are actively involved in international investments. Appendix A shows spread of Malaysian MNCs Foreign Investments according to Region. Despite the negative effects on foreign investments discussed, Malaysian MNCs spread all over the world; carrying out international trades in countries such as United States, Europe, Australia and so on. From Bala (1999) survey, 17 firms are discovered to have more than 20 ongoing international investments overseas. Also, from appendix A, we discovered that North East Asia and the ASEAN countries received the most of Malaysian's investments. The technology advancement of Malaysia had somehow deterred Malaysia firms from undertaking into western countries and competing with the firms with much sophisticated technologies in those countries (Lall, 1986). According to Bala (1999), Sime Darby has the most number of foreign investments, which are 110 foreign activities in 19 countries. The second place goes to Amsteel with 70 ongoing foreign investments, and thirdly is MBF Holding with 60 such activities. The number of MNCs in Malaysia has increased over the year, according to Annuar et. al (1996). In fact, any information about the investments overseas is publicized according to the KLSE listing requirement. Thus, the foreign investment news is relevant to the reactions on these announcements in Malaysian MNCs. As shown by David and Qian (1997), firms anticipate positive returns on the foreign investments or else they will not involve in the activities. Therefore if the previous performance of Malaysia MNCs on investments overseas is good, it will encourage more of such investments. Moreover, if the stock price shows positive returns during the particular announcements dates, it directly means a positive reaction from the market. It also presented a good performance of Malaysia's MNCs on such investments. A successful international investment will also increase firm's profit; and thus generate wealth to the shareholders.
Problem Statement The study focuses on the Malaysia Multinational Corporations (MNCs) listed at KLSE. Previous researches showed that International investments announcements by MNCs are significance to the market, some showed positive and some showed negative market reaction. There must be reasons for firms to invest overseas. If foreign investments do not produce preferable results for the company, there is no point for firms to go abroad. This paper will focus on determining the wealth effects on international investments announcements by Malaysia MNCs. Also, the capital size of MNCS (whether main or second board) will be investigated in the effectiveness to produce market reaction on their foreign investment announcements.
Objectives of the Study This study is to determine the wealth effects of foreign investment announcements in developing market.
Research Questions What are the wealth effects of foreign investment announcements in developing market?
2.1 Foreign Direct Investment (FDI) FDI is the investment that gives investor a controlling interest in foreign company and any way of increasing international business that requires a direct investment in foreign operations (Daniels, Radebaugh and Sullivan, 2007). Here, Madura (2006) states those foreign direct investors are not hoping to gain profit from foreign investments, but also consider expanding their businesses in foreign country and the exchange of operation and management skills. McManus (1975) however, finds FDI is possibly in industries with considerable interdependence among producers across nations to lessen transactions costs and to assure the internalization of the net ownership rents. According to Edward R. B. et. al. (1997), entry transactions are classified into three modes that we define as mergers and acquisitions, joint ventures, or subsidiary investments and plant expansions. However, Beamish & Banks (1987) and Tang &Yu (1990) state that traditional entry mode usually is on wholly owned subsidiaries. Besides, joint ventures may sometimes be preferred over wholly owned subsidiaries because the costs are much more easily controlled. According to Gomes-Casseres, B. (1990) on the other hand, firms entering foreign markets for productions prefer structures that minimize transaction costs of doing business. In contrast, actual ownership structures that arise ex post depend on the bargaining power of the entering firm relative to other existing firms and governments. Bhaumik and Gelb (2004) explain some advantages that MNCs will get from overseas acquisition. First, MNCs can reduce or eliminate the cost of gathering resources together to build a firm. Moreover, MNCs can gain knowledge about the local markets and institutions and the business relationships. Furthermore, it facilitates MNCs to keep their own management and operation skills and the control of their existing technology. Acquisitions also cause MNCs to bear the cost of integrating the production structure, organizational structure and corporate culture of the acquired firm into its own. Joint venture however, is pooling of assets in a common and separate organization by two or more firms who share common ownership and control over the use and returns of these assets (Kogut and Singh, 1988). In this entry mode, two parties agree to contribute their equity to form a new entity and undertake the economic activity together. Revenues, expenses and the control of the enterprise will be shared from business.
2.2 Factors of FDI Considerations Edward R. B. et. al., (1997) states some of the factors for foreign investments to occur. One of them is government nonmarket incentives that twist the normal functioning of local supply and demand patterns. Besides, non-governmental imperfections and situational factors also impact upon foreign firm entry decisions. Informational and distribution inefficient markets that fail to perform proper signaling and rationing functions and leading to foreign capital entry and exit behaviors also contribute to FDI activities. Bany and Fauzias (2006) however, urge that market reaction is different for developed and developing countries. It is because developed countries have higher skills of management and technology and stable economical and political conditions. Developing countries on the other hand, always refers to a country with lower capital, possesses lower technology level and lower standard of living. It becomes a competitive advantage for Malaysia MNCs to invest in developing countries due to the lower technology skills of the local companies. The business culture in developing countries is also similar to Malaysia, thus it is easier for Malaysia MNCs to compete successfully with local firms. It is statistically proved that the significant result on FDI announcements is only because of the technology advantage of Malaysia MNCs (Bany and Fauzias, 2006). It is also found that for international JV, the wealth gains are found to be influenced by the size of the firms; the smaller the firms, the higher the gains. Besides, industrial sector of the firm also affects wealth on international JV. In addition, unincorporated JV is also believed to provide higher gains on investments (Janakiramanan, Lamba & Seneviratne, 2005). Nevertheless, there are risks to be considered before firms opt for FDI. Country risk is one of the considerations (Madura, 2006). There are two main country risks: political and financial risk. Political risk includes attitude of customers in the host country, actions of host government, blockage of fund transfer, currency inconvertibility, war, bureaucracy, and corruption. Financial risk however, is the current and potential state of the country's economy; for example interest rate, exchange rate, and inflation rate. Another type of problem is related to agencies, also called as dissemination risk; which is the main problem for international joint venture. Dissemination risk refers to the extent to which a firm's intangible assets like marketing and production technology are likely to be mimicked by competitors (Edward R. B. et. al., 1997). In the context, JV can lead to a transfer of the intangible asset or technology owned by the MNC to the local partner, whether accidentally or intentionally (Bhaumik and Gelb, 2004). Always, acquisition and JV allow access to the firm-specific like assets in the host countries (Duarte & Canal, 2002). Under this condition, the agency problem will occur and the relationship between partners will dissolute within a relatively short period of time (Sinha, 2001). If dissemination risks are large, entering firms will choose to purchase wholly-owned subsidiaries, expand existing capacity, or acquire assets of local entities rather than contracting through joint ventures or licensing arrangements (Edward R. B. et. al., 1997).
2.3 The Wealth Effect of FDI Announcements There are various researches and studies on market reactions based on different announcements. For example Masulis (1980), Ball Brown and Finn (1977) on capital structure changes; Bradley, Desai and Kim (1988) on merger and acquisitions; Scholes (1972) on common stock's right issues; and Chan, Gau and Wang (1995) on business relocation. This paper will focus on the wealth effect of international investments announcements. Similarly in terms of technique, Annuar and Shamsher (1992, 1993) analyze the effects of stock splits and rights issues announcements on share prices in Malaysia. As a result, these announcements create reactions in the market and produce positive abnormal return to the investors. Thus, it is believed that foreign investment announcements are alike to those announcements and they will create market reactions. The market price should change upon the release of such information. In Malaysia, Bany and Fauzias (2006) proved that market react positively and significant to the shareholders on the foreign investment announcements. In US, Etabari (1993) prove that the reaction of US stock price towards 25 international joint ventures announcements between US firms and firms in Eastern and Central European countries reacted positively towards the announcements. Moreover, McConnell and Nantell (1985), Mohanram & Nanda (1998), and Johnson & Houston (1999) also show that stock price of US firms reacted positively towards the international JV announcements. Next, Lummer and McConnell (1990) verify that foreign joint ventures for US firms produce positive return as the joint ventures are viewed from value enhancement. It was also discovered that the stock price reacted positively significantly, especially when the venture partner is a foreign firm, as opposed to a foreign government. In addition, Cructchley, Guo, and Hansen (1991) find out that both the Japanese and the US market produce positive reaction when there is international cooperation announcement between firms from these two countries. Doukas and Travlos (1988) discover that US MNCs gain the most when they announce acquisitions in less developed countries. It is also verified that multinationals not already operating in the target's country benefit from their announcement acquisitions. Next in Australia, Janakiramanan, Lamba & Seneviratne (2005) provided evidence that domestic and international JV in Australia brings positive abnormal return over a two-day announcement period. In India however, FDI announcements will bring significant positive impact to Indian MNCs in the short period. In the longer period, negative abnormal return will occur to both Indian & Chinese MNCs, and it was statistically insignificant to Indian acquirers but statistically significant to Chinese acquirers (Cheng, Wickramanayake & Sagaram, 2003). Shapiro (1996) explains that firms will gain from these international investments activities when countries are less than perfectly correlated. This enables firms to reduce the variability of their earnings provided they have their investments in multiple countries. Additionally, firms will be able to increase market share by expanding internationally. Firms can achieve economies of scale faster by having bigger market. It is said that such investment announcements will result in higher stock returns as it could improve firm's profitability. Anyway, there are studies showed some negative reactions on international investment announcements. Malhorta and Zhu (2006) attest that international acquisition announcements made by Indian firms create significant positive short-term, yet negative impact on shareholders' wealth. In US, Markides and Ittner (1990) discover that investors' reaction to US firm's foreign ventures with foreign firms in Canada and the UK is negative and only joint ventures with firms in Continental Europe create positive wealth effect. Besides, Gleason & Mathur (1998) conclude that shareholders of US banks experience significant negative excess returns when banks make international acquisition announcement, especially in developed countries. In Europe moreover, Fatemi and Furtada (1988) show that German's foreign investments announcements are taken unfavorably by the market. In Korea, Kim (2003) sums that the FDI made by Korean MNCs in developed countries may not possess competitive advantages over local competitors. Firms are more likely to gain from FDI in developing countries than in advanced economies. Therefore Korean MNCs announcement effects of FDI in advanced countries are not statistically significant, while the announcement effects in developing countries are positive and statistically significant. Then, Feils & Sahoo (2000) stress that local acquisitions will only bring negative wealth effect to the shareholders, but give positive wealth effect in international acquisitions. Moeller, Schlingemann & Stulz (2002) however, discover that small firms are significantly better than large firms when they make acquisition announcements. Abnormal return associated with acquisition announcements for small firms exceed the abnormal return associated with acquisition announcements for large firms. In the free cash flow theory of Jensen (1986), manager may sometimes over-invest in some unprofitable projects that will eventually diminish the value of parent firms on such foreign investments. In addition, Madura (2000) suggests that when firms expand beyond their national borders, unfamiliarity to operate within a new set of national and corporate cultures create barriers that may offset the gain a firm might obtain from international expansion.
2.4 Testable Hypothesis From the above literature reviews, it is clear that different studies pointed out different views of FDI. In this paper however, the following hypothesis is constructed: H0: There is no significant result on wealth effect of international investment announcements. H1: There is significant result on wealth effect of international investment announcements. A successful FDI will increase the firms' profits and shareholders' wealth. Thus in this paper, the wealth effect of international investments announcements will be tested for the purpose.
RESEARCH METHODOLOGY The research method follows specifically with the literature review. Firstly, information and journals related are obtained using available sources like the library and internet. Then, data is collected from sample. Finally, data is analyzed and determinants are developed.
3.1 Literature Review Plenty of previous researches study on the impacts of foreign investment announcements on stock returns. It is assumed that market capital is sufficient and thus the price of securities is implicit and instantly adjusted to the public release of new information. Therefore, it is worthy to look into the wealth effect of international investment announcements for which the importance have been described in previous chapters.
3.2 Research Approach Deductive approach is performed in the research. First and foremost, hypothesis was developed. Then, a research strategy was designed to test the hypothesis. In this case, historical data will be used to test the particular hypothesis.
3.3 Research Method The research is carried out using quantitative method. Secondary data is used, which are share prices in Kuala Lumpur Stock Exchange (KLSE). The data is showed in quantitative form for the purpose of the study. The result calculated is used to determine the wealth effect of foreign direct investment announcements.
3.4 Data Collection and Sampling Stock prices of all MNCs are collected from KLSE. In the context, prices during the period of foreign investment announcements made are used for the purpose. Targeted period of the stock prices is 15 days before and after the announcements, which is 31 days all together. Historical two years of daily stock prices before 15 days of announcements also required for calculation of beta and alpha. Data needed is from 1999 to 2003 as the sample MNCs are from the year 2002.
3.5 Data Calculation The standard event-study methodology is used in this research to assess the impact of foreign investment announcements. The method is based on market model describe by Fama (1976). It is predicted in the model that a firm's normal or expected return given the market return and the firm historical relationship to the market. For each firm, the following model is estimated: E= + + Where : E = Expected return on the security of firm I at time t; = return on the market portfolio at time t, proxied by the return on the KLCI and = parameters of the relationship between the return on the individual security and that of the market = residual of the relationship at time t The parameter alpha () and beta () are estimated for each security i over the period of two years prior to the announcement of the foreign investments. These parameters are then used to calculate the expected returns over the test period. The difference between the actual returns () and the expected returns for each day and for each firm are called abnormal returns ( ) and are calculated as follows:
= - ( + ) Here and are the estimated parameters a and b of firm i. The abnormal returns (AR) of each company stock are determined over the event period of 31 days (t = -15 to t = +15). On average, the expected abnormal returns are zero if announcements of direct foreign investments have no impact on stock prices. Besides, all of the firm's abnormal return observations are cumulated to draw overall inferences for the event of interest. Average effects of the announcement are examined rather than study each firm separately, as other events are occurring and averaging across all firms should minimize the effect of these other events (Haugen 2001). For sample of N firms, a daily average abnormal return (AR) for each day t is obtained:
= Then, to find out if there is an impact of foreign investment announcements on stock returns, which will produce a significant average daily abnormal return, the student t test statistic on any day t in the event window for all n stocks is created. t-statistic = ARt / ÂÂ³ARt Where: ÂÂ³Art = standard deviation of average abnormal return over the event period of ( t = -15 to t =+15) The expected returns and abnormal returns once the foreign investments announcements are made could be found by using these formulas. The daily average abnormal returns for all the sample stocks surrounding the announcements date should be statistically significant if there is an impact on the announcements. Significant figure on the t-statistic implies foreign investments announcements create market reaction, either positive or negative.
RESULTS AND FINDINGS
4.1 Overall Samples Table 4.1 and 4.2 show the average daily abnormal returns and the t-statistic value of the total of 39 samples of foreign investment announcements for the period -5 to +5 days. The data is separated into two main categories: main board (Table4.1) and second board (Table 4.2) in Kuala Lumpur Stock Exchange (KLSE). In table 4.1, the average daily abnormal returns on the announcement date is -0.00611 with t-value of -0.9957. Although it shows negative AAR; however, t-statistic value shows insignificant result of international investment announcements. Therefore, there is no significant result on wealth effect of international investments announcements for main board firms. Similarly for second board firms, there is no significant result due to t-value of 1.2448 on the declaration day; although the AAR shows positive returns of 0.015827. Nevertheless, the t-value is significant for main board firms one day before the announcements, which is 2.31657 (5% significant). It shows positive significant result (AAR = 0.01422) for main board firm on FDI announcements one day before the declarations. Table 4.3 and 4.4 show cumulative average daily abnormal returns and the t-statistic value of the total of 39 samples of foreign investment announcements for the period -5 to +5 days, for main and second board in KLSE. On the announcement date, table 4.3 shows positive significant result of 10% (t-value = 1.89556, CAR = 0.00994) on the announcement date of the foreign investments announcements by main board. Also, it shows 1% significant positive reactions one day before and after the announcement date, where t-value day-1 = 3.06119 (CAR = 0.01605), and t-value day+1 = 3.2631(CAR = 0.01711). Here, it is clear that international investment announcements create wealth for shareholders in main board firms as the capital size is larger compared with second board firms in KLSE. Next, according to table 4.4, there is positive result on second board firms of international investment announcements, with CAR of 0.06207 on the announcement date. However, the result is not significant as the t-value is only 1.118655 on the declaration day. In short, based on the results shown, international investment announcements create positive significant wealth effect for main board firms in KLSE. For second board firms however, the market does not react directly towards the foreign investment announcements.
Table 4.1: Abnormal Returns for Main Board Firms around the Announcement Period
t-statistic -5 0.00430206 0.700734111 -4 0.000349879 0.056989531 -3 -0.004640331 -0.755832834 -2 -0.000652968 -0.106357667 -1 0.014222296 **2.316575605 0 -0.006113253 -0.99574731 1 0.007172176 1.168228197 2 -0.010167319 -1.656087215 3 -0.004847547 -0.789584843 4 0.001572231 0.256090239 5 0.005137838 0.836868386
Table 4.2: Abnormal Returns for Second Board Firms around the Announcement Period
t-statistic -5 -0.002991129 -0.235249704 -4 0.009798002 0.770604441 -3 0.015774312 1.240636036 -2 -0.011074279 -0.870982463 -1 -0.011236461 -0.883737983 0 0.015827438 1.244814334 1 -0.004076424 -0.320607209 2 0.006470196 0.508875316 3 -0.006550335 -0.51517817 4 -0.006590779 -0.518359104 5 -0.01347014 -1.059414881
Table 4.3: Cumulative Abnormal Returns for Main Board Firms around the Announcement Period
t-statistic -5 0.006775798 1.291961568 -4 0.007125678 1.358674105 -3 0.002485346 0.473888332 -2 0.001832378 0.349384942 -1 0.016054674 ***3.061192428 0 0.009941421 *1.895560275 1 0.017113597 ***3.263100347 2 0.006946278 1.324467437 3 0.002098731 0.400171211 4 0.003670961 0.699953107 5 0.008808799 1.679599939
Table 4.4: Cumulative Abnormal Returns for Second Board Firms around the Announcement Period
t-statistic -5 -0.044180765 -0.796216099 -4 0.059356685 1.069713206 -3 -0.027703464 -0.499265768 -2 0.056520099 1.018592874 -1 -0.044377754 -0.799766181 0 0.062072397 1.118655164 1 -0.033324767 -0.60057166 2 0.088021262 1.586299954 3 -0.04795838 -0.864295447 4 0.07506993 1.352893868 5 -0.068604031 -1.236366844
* Significant at 10%
** Significant at 5%
*** Significant at 1%
DISCUSSIONS AND CONCLUSION
5.1 Discussions This research focuses on the analysis of wealth effect of international investment announcements in developing countries, specifically Malaysia. As the result shown, the abnormal return of main board securities shows significant positive result surrounding the announcement period. The result is consistent with the research done by Bany and Fauzias (2006) which proved that the abnormal return of the securities are significantly positive around the declaration date. It implies that the unexpected cross border investment announcements do contain new relevant information and market does react on it. Also, investors generally respond favorably to the foreign investment efforts of Malaysia firms listed at KLSE. This result is also consistent with Etabari (1993), Crutchchley et. al (1991), and Lummer and McConnell (1990). As the market responds positively towards Malaysia main board MNCs foreign investment announcements, there must be reasons for this phenomenon. One of the reasons is according to a report presented by David & Qian (1997), which studied on Singapore's multinational investments. David & Qian (1997) say that Singapore is a small open economy, where the market becomes saturated as the economy matures. Competition among firms will be intensified and thus firms will go abroad to search for new market and opportunities in order to maintain competitiveness. Bala (1998) also suggests that market saturation will become predictable when industries slowly approaching the maturity stage. Thus, firms' strategy to invest overseas seems appropriate as it may help firm to improve competitiveness and profitability. Investors therefore, will predict positive sign on this type of announcements. Another point is regarding the investors' perception on the ability of firms to perform in foreign investments. As main board is always meant for more established companies and second board for relatively smaller companies; investors perceive main board firms to have higher ability in handling overseas investments. As stated in Annual PNS Entrepreneurs Gathering PWTC (2001), one of the quantitative requirements of main board firms is an uninterrupted profit record of 3 or 5 years RM30 million aggregate profit after tax; but only an uninterrupted profit record of 3 or 5 years RM12 million aggregate profit after tax for second board. Here, the larger capital size of main board firms makes the market to be more confident and optimistic on overseas investments announced by main board firms rather than second board. Investors anticipate the share price to have positive respond around the declaration and thus they will act based on their expectation. Similarly, the result shows that there is no significant wealth effect on second board international investment announcements. It implies that there is no market reaction due to the announcements of second board firms' investments overseas. Market thinks that there will be no positive or negative effect on international investments by second board firms. Thus, they will do nothing on the announcements. Moreover, it also implies that there is no new information contained in the announcements. The trend may be explained by Madura (2000) that when firms expand beyond their national borders, unfamiliarity to operate within a new set of national and corporate cultures create barriers that may offset the gain a firm might obtain from international expansion. Investors perceive that to invest for such announcements are risky.
5.2 Conclusion This study is to determine the wealth effect of international investment announcements in developing market. The market reaction followed by international investment announcements made was tested using the historical share price from KLSE (1999-2003). The result shows that there is positive significant result of main board firms' foreign investment announcements, with a significant level of 10% on the announcement day. However, there is no significant effect on the shareholders wealth for second board firms' announcements. The result is consistent with the hypothesis proposed, where there is significant result on wealth effect of international investment announcements. H0 is rejected and H1 is accepted. In short, Malaysian MNCs international investment announcements create shareholders wealth confirming the findings of Bany and Fauzias (2006). Anyway, it is only true for main board firms but not the second board.
5.3 Recommendations In general, this study enhances the literature of market reaction on Malaysia stock market by examining on the foreign investment announcements. Also, this paper verifies previous foreign investment studies, which have found that such firms' cross border investments create favorable wealth effects. In fact, this study generates plenty of interesting issues to be addressed in the future. Firstly, this study can be extended to examine the abnormal return based on the level of development of the target country. For example, Ueng et. al. (2000), Doukas & Travlos (1988), and Bany & Fauzias (2006) proved that the foreign investments in developed countries generate higher positive returns for their shareholder than those investments into developing countries. Furthermore, a study can also be conducted to examine if the abnormal return formed based on the announcements by Malaysia MNCs which may be related to the relative strength of Malaysia currency (RM). Model study included Mathur, Rangan, Chachi, and Sundaram (1994) which find that a decline in the value of the US dollar is associated with more favorable abnormal returns to foreign investors to pursue US investments. The decline in US dollar lowers the cost of investments to foreign investors, and therefore the foreign investments is perceived to be positive as lower cost guarantees higher returns. The same theory can be applied to Malaysia, where a relatively stronger currency of RM compared with other country enables local investors to gain more and vice versa. Next, a study to determine the preferable mode of entry of international investments (Joint Venture, acquisition, or Greenfield) can be constructed. There are a number of studies focus on a particular mode of entry, like Etabari (1993), McConnell and Nantell (1985), Mohanram & Nanda (1998), and Lummer and McConnell (1990) verify a positive significant result on the abnormal return based on international Joint Venture investments. There are few researches that look into the most preferred mode of entry for direct foreign investments. Therefore, this kind of study will help international investors to figure out the most beneficial mode of overseas investments.