E. The Change in Investor Sentiment
V. Conclusions and Discussion
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V. Conclusions and Discussion
Our research presents tests of three key hypotheses showed in chapter IV, section B.
The tests are quite clean of informational effect, since we focus on an event which is fully anticipated. The warrants included in our sample are deep in-the-money prior to the expiration day. Consequently, their exercise is quite certain.
Therefore, any price change of stocks at the warrants expiration could be attributed to the effect of the consolidation of trading in two equity claims－warrant and stock－
that are traded individually in advance.
Our results showed above could be simply separated into two stages. In the first stage, we test how the warrants expiration affects the stock liquidity according to our two hypotheses, H1 and H2. In the second stage, we test the relation between the improvement of the stock liquidity and CAR following the warrants exercise. To begin with, we exam the whole sample period to test our hypotheses. Then we further classify our samples by VIX used as a proxy of investor sentiment.
The results show that Hypothesis H1 is stronger when investor sentiment is relative low, especially in the period from high VIX to low VIX. The stock liquidity is improved significantly following warrants expiration while VIX becomes relatively low. However, the effect is getting feeble gradually when investor sentiment rises. One reasonable explanation is that investors incline to invest in the same equity. In the period of low VIX which represents that the markets are stable, investors would be relieved to invest more despite losing a hedging tool after warrants expired. Nevertheless, in the period of high VIX, investors might be more cautious about investment. Hence the stock liquidity decline following warrants exercise. Hypothesis H2 gets stronger apparently when investor sentiment is relatively high, especially in the period from low VIX to high VIX.
Besides, according to our Hypothesis H3, CAR is visibly an increasing function of
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the stock liquidity which benefits from market consolidation. The hypothesis is established nearly all sample periods. It is not significant only in the period from low VIX to high VIX. Our explanation is that investors might be vulnerable in the period of high VIX. Most of the stock liquidity might come from liquidity providers since the force of sell-sides must be stronger than the one of buy-sides. Hence the stock liquidity would not bring up the stock prices.
Our main contribution is that we add a really important factor, investor sentiment, into our methodology. According to our evidence showed in this paper, investor sentiment does affect the results of market consolidation. Comparing with previous literatures, for example, Amihud, Lauterbach, and Mendelson (2003), we further consider more variables enhancing the robustness of our results.
Since our results are based on all the call warrants which are deep in-the-money, we suggest that the following research could consider adding the put warrants into the samples or using different criteria to classify the warrant types. The ARs of the underlying stocks during the certain event dates may exist chances to be arbitraged.
However, the magnitude of the ARs would affect the opportunities of arbitrage. We suggest that following researches could keep observing the ARs since the opportunities of arbitrage would not persist ever. Besides, arbitrage must also consider the cost of trading fees and taxes.
Furthermore, the trading mechanism of warrants in Taiwan had changed from call auction to continuous auction since June 28th, 2010. The following research could also study how the effect of trading consolidation would change after the trading mechanism altering.
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References
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Appendix
Table A 1
Securities Trading Value Percentage by Type of Investors (Unit: %)
Year
Domestic Individual
Domestic Juridical Person
Foreign Individual
Foreign Juridical Person Purchase Sale Purchase Sale Purchase Sale Purchase Sale
2001 42.02 42.39 4.72 4.97 0.00 0.01 3.26 2.63
2002 41.20 41.10 4.95 5.10 0.52 0.45 3.34 3.34
2003 38.62 39.22 5.39 6.12 0.74 0.50 5.25 4.16
2004 37.82 38.12 5.63 5.93 0.92 0.71 5.62 5.25
2005 34.02 34.82 6.10 7.19 1.36 1.05 8.52 6.94
2006 34.87 35.69 5.36 5.68 1.21 1.04 8.57 7.58
2007 33.51 33.75 6.57 6.44 1.07 1.04 8.85 8.77
2008 31.10 30.56 7.18 6.79 1.05 1.21 10.67 11.45
2009 35.67 36.38 5.75 5.84 0.02 0.02 8.56 7.76
2010 33.83 34.12 6.69 6.89 0.02 0.02 9.46 8.97
Source: Taiwan Stock Exchange.