Two essays of the information impact on the valuation of closed-end funds

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(1)國立政治大學財務管理系博士論文指導教授: 張元晨博士. Two Essays of the Information Impact on the Valuation of Closed-end Funds. 研究生: 廖憲文. 中華民國九十四年元月十三日.

(2) Acknowledgements. Earning a PhD degree is just the starting point of the following research career. Hence, I am greatly indebted to my advisor, Professor Yuanchen Chang, for his literally and kindly guiding me throughout my PhD study at National Chengchi University. His patient advises lead me to develop my thesis and to complete the dissertation. I would also like to express my truly gratitude toward the members of my PhD advisory committee, Professor Shing-Yang Hu, Professor Hsiou-Wei Lin, Professor Jie-Haun Lee, and Professor Yao-Min Chiang.. Their precious comments and suggestions lend my. dissertation to substantial changes and improvement of quality.. I am also thankful for the director of the board of Chung Kuo Institute of Technology, Josephine Su, for her kindly offering me two years on leave with pay to concentrate the study. Professor Robert C.W. Fok, at University of Wisconsin-Parkside, and Professor Roger Meznik, at University of Columbia, are also very helpful in reviewing my dissertation and need my appreciation. I would also like to thank my colleague, J.Y. Huang, for her help in the process of my research life..

(3) Finally, I truly appreciate my wife, Yu-Xing Deng, for taking care of our family and our lovely daughter.. Hsien-Wen Liao January 18, 2005.

(4) PREFACE. Two papers are produced based on the results from this dissertation.. The merit of. using closed-end funds to study investors’ sentiment is that closed-end funds are parallel valued, and hence we can compare the investors’ behavior with their fundamental value. The first paper is based on Chapter Two.. Entitled “The Impact of Political. Information on Fundamental Value and Market Value: Evidence from Taiwan’s Closed-end Funds”, it was presented at the 2005 Conference on Finance of Academic and Practice, held by department of finance of Tam Kang University, on 7 January, 2005. This paper explores the theory of investors’ sentiment and the theory of market efficiency, using Taiwan’s closed-end funds data.. Our empirical results show that the. assumption of market efficiency is corroborated by three out of four political events in the sample, while the remaining one event induces changes which are inconsistent with market efficiency.. These results provide some support for the theory of investors’. sentiment in the closed-end funds literature. The second paper is based on Chapter Three. Entitled “News Effects on the Valuation of Closed-end Country Funds: Evidence around the Asian Financial Crisis Period”, this paper was presented at the 2004 International Conference on Finance, held by National Taiwan University, on 20 December, 2004.. In this paper, we use six Asian. country funds, listed on the New York Stock Exchange, to test whether salient country-specific news affects investors’ reaction around the Asian financial crisis period. The results are consistent with the hypothesis that news events, especially for economic news, do play a role in the magnitude of investors’ reaction to changes in the fundamental values of closed-end country funds.. During the financial crisis period,.

(5) the news effects are more significant than the other periods.. We also find that financial. crisis itself is the lower bound for the negative news effects on the closed-end funds..

(6) ABSTRACT. This dissertation studies investors’ sentiment to dramatic public information events and the news effect on the valuation of closed-end funds. included in this dissertation.. There are two main issues. For the issue of investors’ sentiment, we employ. domestic closed-end funds from Taiwan to test how political information events affect fund share price and net asset value. The political information events employed are the 1996 and 2000 presidential elections in Taiwan, including prominent political events ahead of the elections. For the other issue of news effect on the valuation of closed-end country funds, the six Asian country funds listed on the New York Stock Exchange are employed and the country-specific news are culled from the headlines shown on the front page of The New York Times. For investors’ sentiment, we examine how dramatic political news and events affect closed-end fund data, fund price, and net asset value, using a sample of Taiwan data.. We use data from Taiwan, because its stock market has been repeatedly affected. by political events.. We develop a theoretical model to show how information shocks. would affect the discounts on closed-end funds.. In designing the model, which is. tested below, we start by assuming that the information shock is consistent with market efficiency.. Our empirical results show that, even though this assumption is. corroborated by three out of four events, the remaining one event in four induces changes which are inconsistent with market efficiency. theory of the preponderance of investors’ sentiment.. This provides support for the. The results also show that the. return on fund share prices and the return of net asset value (NAV) move in the same direction and the impact of information shocks to the return of fund share price and.

(7) return of NAV have mostly the same sign. Although the results from domestic funds, with fund share prices and NAV that are valued in the identical market, tell us that there exists investors’ sentiment, we intend to resolve what the information effects are on the valuation of closed-end country funds that have fund share prices and NAV valued in two different entities/markets. We use a sample of six Asian country funds, listed on the New York Stock Exchange, to test whether salient country-specific news affects investors’ reaction around the Asian financial crisis period.. Our results show that in regular weeks, fund. share prices react less to changes in fundamentals.. In weeks with salient news. appearing on the front page of The New York Times, fund share prices react much more than those in regular weeks.. We also find that economic news affects the adjustment. process of fund share prices more significantly before and during the Asian financial crisis periods.. These results are consistent with the hypothesis that news events play a. role in the magnitude of investors’ reaction to changes in the fundamental values of closed-end country funds.. As to the reaction of volume to news, the results show that. news effect is significant in full sample period.. For the reaction of volume to. categorized news, economic news is significant in full sample period. In sum, the results from either domestic funds or country funds all show that news events/information do play a role in individual investors’ sentiment. is more conspicuous during a financial crisis period.. The phenomenon.

(8) TABLE of CONTENTS CHAPTER ONE Introduction ……………………………….…………….………1 CHAPTER TWO. The Impact of Political Information on Fundamental Value and Market Value: Evidence from Taiwan’s Closed-end Funds …………………………………………………...…..…..7. 2.1 Introduction ………………………………………………………….……...7 2.2 The Theory of Market Efficiency and Investors’ Sentiment ……….……. .10 2.3 Theoretical Model: The Effect of Information Shocks ………….….…......15 2.4 Data and Methodology ……………………………………………….……22 2.4.1 The sample of funds ………………………………………….………22 2.4.2 The news events ………………………….…………….……...……...23 2.4.3 Setting up testable hypotheses …………………….………….…....…25 2.5 Empirical Results and Discussions ……………………..….………..........…27 2.5.1 Summary statistics …………………………………….………...........27 2.5.2 Preliminary results of the information effect to NAV and FSP ……...28 2.5.3 The relation between NAV and FSP …….………………..…….…….30 2.5.4 The information effects on return of NAV and Return of FSP .....…...33 2.6 Summary Remark …………………………………………………….……38 CHAPTER THREE. News Effects on the Valuation of Closed-end Country Funds: Evidence around the Asian Financial Crisis Period ….…..53. 3.1 Introduction ………………………………………………………………..53 3.2 Literature Review ………………………………………………………….54 3.2.1 The effects of news arrivals on the valuation of asset prices ………..54 3.2.2 Closed-end fund and investors’ reactions to news arrivals ……...…..55 3.3 Data and Methodology …………………………………........…………….57 3.3.1 Data description ………....………………………....…........…..........57 3.3.2 News events …………………………………………...….…...…….59 3.3.3 Research methodology ……………….………...………...……...….60 3.4 Empirical Results and Discussions ………………………...………...……61 3.4.1 Results of OLS regressions of FSP’s reaction on the changes of NAV…………………………………………........62 3.4.2 News effects on the underreaction of FSP i.

(9) for the full sample period …………………………………………….63 3.4.3 News effects on the underreaction of FSP around the Asian financial crisis period ……....……...……………...64 3.4.4 Different categorized news effects for the full sample period ………………………………………….....65 3.4.5 Different categorized news effects around the Asian financial crisis period …………………....…...…...66 3.4.6 The reaction of fund share volume to news .........................................67 3.5 Summary Remark ……………………………………………………….....68 CHAPTER FOUR Conclusion …………………………………………………….83 REFERENCES ……………………………………………………………………….88 APPENDIX A …………………………………………………………………………93 APPENDIX B …………………………………………………………………………94 APPENDIX C …………………………………………………………………………95. ii.

(10) LIST of FIGURE Figure 2.1 The Positive Information Effect on Closed-end Fund Discount…..……41. iii.

(11) LIST of TABLES Table 2.1 Summary Statistics……………………………………………………..…..42 Table 2.2 Comparison of Returns for Sailent Political Events Between Taiwan and PRC………………………………………………………………..……….44 Table 2.3 Correlation of Discount Between Individual Fund and Value-weighted Discounts (VWDISC) …………………………………….…..…………..45 Table 2.4 Test of Granger Causality……………………………….…………………46 Table 2.5 The Relation Between Fund Sahre Price and NAV………………...….....48 Table 2.6 The Information Effect on Fund Share Price and NAV…………….……50 Table 2.7 Test for Symmetrical Information Effect on Fund Share Price and NAV …………….…………………………...………......……...….........…52 Table 3.1 General Characteristics of Country Funds Sample……………...…….…70 Table 3.2 Country funds Summary Statistics ………...………………..……....…....71 Table 3.3 The Reaction of Fund Share Price to Net Asset Value…………….…...…72 Table 3.4 News and Impact of the Reaction of Fund Share Price to Net Asset Value………………………………………………….…............74 Table 3.5 The News Effect around the Asian Financial Crisis ………..……....……76 Table 3.6 Different Effects of Different Categories of News Reports on the Reaction of County Fund Prices and Net Asset Values……………………………79 Table 3.7 Categorized News Effects around the Asian Financial Crisis Period ......80 Table 3.8 The Reaction of Volume to News ................................................................81 Table 3.9 The Reaction of Volume to Categorized News around the Asian Financial Crisis ............................................................................................................82. iv.

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