how dividend policy anp leverage influence the
TRANSCRIPT
HOW DIVIDEND POLICY ANP LEVERAGE INFLUENCE THE STOCK PRICE VOLATILITY?
Bong Hui Hian .
Bachelor of Finance (Honours)
2012
Pusat Kbid81at Maklumat Akademik UNIVERSm MALAYSIA SARAWAK
P.I<HIDMAT MAKLUMAT AKADEMII<
111111111Illfll11111 IIII 1000245028
HOW DMDEND POLICY AND LEVERAGE INFLUENCE THE STOCK PRICE VOLATILITY?
BONG HUI HIAN
This project is submitted in partial fulfillment of the requirement for the degree of Bachelor of Finance with Honuors
.'
Faculty of Economics and Business UNIVERSITI MALAYSIA SARAWAK
2012
Statement of Originally
The work described in this Final Year Project, entitled "HOW DMDEND POLICY AND LEVERAGE INFLUENCE THE STOCK
PRICE VOLATILITY?,' is to the best of the author's knowledge that ofthe author except
where due references is made.
(Date submitted) (Student's signature)
Bong HuiHian
23223
..'
ABSTRAK
BAGAIMANA POLISI DIVIDEN DAN PENGHUTANGAN
MEMPENGARUHI TURUN NAIK HARGA SAHAM?
Oleh
Bong Hui Hian
Kajian ini menyelidikan hubungan antara turon naik harga saham hasil dividen,
nisbah pembayaran, penghutangan dan saiz finna untuk 470 finna bukan kewangan
di Malaysia dari tahun 2005 hingga 2010. Pada tempoh krisis, trend turon naik harga
saham di Malaysia telah meningkat manakala trend tersebut telah menurun pada
tempoh pasca krisis. Tempoh kajian ini telah dibahagikan kepada dua tempoh iaitu
tempoh sebelum krisis (2005-2007) dan tempoh pasca krisis (2008-2010). Di
sepanjang ternpoh kajian ini, keputusan kajian itu telah menunjukkan bahawa nisbah
pernbayaran dan penghutangan adalah selaras dengan teori hipotesis isyarat dan teori
perintah kombinasi. Pada tempoh kajian sebelum krisis, hasil dividen adalah
mengikut teori hipotesis isyarat; rnanakala penghutangan tiada hubungan dengan ,,'
turun naik harga saham berdasarkan Teori Modigliani dan Miller (M & M n). Pada
tempoh pasca krisis, nisbah bayaran ialah faktor yang tidak mempengaruhi turon
naik harga saham berdasarkan Teori Modigliani dan Miller (M & M 1); manakala
perhutangan adalah selaras dengan teori perintah cornbinasi.
Kata-kata kunci: Turun Naik Harga Saham, Polisi Dividen, Perhutangan, Saiz
Finna
ABSTRACT
HOW DIVIDEND POUCY AND LEVERAGE INFLUENCE THE STOCK PRICE
VOLATILITY?
By
Boog !lui Biao
This study aims to investigate the stock price volatility's trend of 470 non-financial
listed firms in Malaysia from 2005 to 2010. Besides, the relationship of stock price
volatility with dividend policy (payout ratio and dividend yield), leverage and firm
size also been examined. The stock price in Malaysia shows its volatile trend during
the financial crisis period. However, at post-crisis period, the trend is less volatile
among the Malaysian's firms. In overall, the findings show that the payout ratio and
leverage are tending to signaling hypothesis theory and the pecking order theory
respectively. At the pre-crisis period (2005 to 2007), the dividend yield supports the
signaling hypothesis theory; while leverage has no impact on stock price volatility
which reflected Modigliani and Miller Theory (M&M II). During the post-crisis
period (2008 to 201 0), the payout ratio is insignificant as proposed byModigliani and
Miller Theory~' (M&M I); whereas the levera~e follows the pecking order theory
showing a significant positive relationship with the stock price volatility.
Keyword: Stock Price Volatility, Dividend Policy, Leverage, Firm Size
ACKNOWLEDGEMENT
First at all, I would like to express my deepest thanks to my supervisor,
Madam Josephine Yau Tan Hwang for her guidance, useful advices, suggestions and
support to accomplishment of this study throughout the session 2012. In addition, I
sincerely appreciate on her willingness and patience in guiding and teaching me a lot
all the way.
I would also like to express my special thanks to the Senior lecturer of
Faculty of Economics and Business, Dr Chu Ei Yet. He had guide and teaches me in
running the regression tests for this study. Besides, a grateful thanks to my beloved
best friends, Miss Cindy Yeo, who had never disgusted to help me when I faced
problems. In addition, I also would like to thanks my lovely friend, Miss Su Hui
Ling who never stop giving me support and motivate me in completing this study.
Moreover, I would like to thank my beloved parents and brother for their
manual support, strengths, helps and everything they irrigate to me. Finally, I would
like to warmly thank all the staffs of the Faculty of Economics and Business in
UNIMAS for their kindness and support in refining to the accomplishment of this
study.
Pusat Khidmat Maklumat Akad~mi.k UNlVERSm MALAYSIA SARAWA){
TABLE OF CONTENTS
LIST OF TABLES...................................................................... Xl
LIST OF FIGURES..................................................................... Xl
CHAPTER 1: INTRODUCTION 1-17
1.0 Introduction...................................................................... 1
1.1 Stock Price Volatility And Dividend Policy. . . . . . . . . . . .. . . . . . . . . . . . .. . . . . . . .. 2
1.2 Stock Price Volatility And Leverage... ... ... ... ... ... .. . ... .. . . .............. 4
1.3 Theoretical Framework......................................................... 5
1.3.1 Dividend Policy Theories............................................. 6
1.3.2 Capital Structure (Leverage) Theories.............................. 7
1.4 Background of The Study... . . . . .. . . . . . . . . . . . .. . . . . .. . . . . . . . . . . . .. . . . . .. . . . . . . . 10
1.5 Problem Statement........................................ . ..................... 13
1.6 Objective ofThe Study............... . .............................. . .......... 15
1.7 Hypothesis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.8 . Significance ofThe Study............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ~'
1.9 Conclusion............................................................... . ........ 19
vii
20-31CHAPTER 2 : LITERATURE REVIEW
2.0 Introduction....................................................................... 20.. 2.1 Theories of Dividend Policy and Capital Structure......................... 20
2.2 Stock Price Volatility......................... .. .. .. .. . .. .. .. .. .. . .... .. . .. .. .... 22
2.3 Stock Price Volatility and Dividend Policy ................... " ............ , 25
2.4 Stock Price Volatility and Leverage.......................................... 28
2.5 Stock Price Volatility and Firm Sizes... ........................... ...... ..... 30
2.6 Conclusion........................................................................ 31
CHAPTER 3 : RESEARCH METHODOLOGY 37-49
3.0 Introduction........................... ........................................... 37
3.1 Conceptual Framework ......................................................... 38
3.2 Sample ...................... :..................................................... 39
3.3 Data Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . .. . . . . . .... 40
3.3.1 Measurement for Stock Price Volatility............................. 40
3.3.2 Measurement for Dividend Policy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 41
3.3.3 Measurement for Leverage........................................ ..... 42
3.3.4 Measurement For Firm Size........................................... 42
3.4 Hypothesis Development. .......................................... ,. ...... .... 43
3.5 Data Analysis ... ...... ................ ...... ........... ...... ...... ......... ..... 46
3.5.1 Descriptive Statistic ....... ............................................ 46
3.5.2 Correlation Coefficient............ . ........ ........................... 47
3.5.3 Multiple Regression Analysis ..................... ................... 48
viii
(Equation modeling)
3.6 Conclusion ... . ........ ...... ... ... .. . ... ..... . .. . .. . ...... .. ....... ... ... ... ...... 49
CHAPTER 4 : DATA ANALYSIS 50-62
4.0 Introduction. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . ... 50
4.1 Descriptive Statistic Test. .... . ...................... . ........................... 51
4.2 Correlation Matrix Test......... . ......... ............. . ... ... .. . .... .. . ..... ... 53
4.3 Average OfThe Stock Price Volatility .. . ...... '" ...... ........ ....... ... ... 55
4.4 Regression Result For The Stock Price Volatility....... ............... . ... 56
4.4.1 Overall Observation Sample Period From Year 2005 To 2010.. 57
4.4.2 Pre-Crisis Period From Year 2005 To 2007........................ 60
4.4.3 Post-Crisis Period From Year 2008 To 2010...... ... ... .... .... ... 62
4.5 Conclusion......................,.................. ............................ .... 64
CHAPTER 5: EMPIRICAL FINDINGS 65-75
5.0 Introduction.. . ..... . ....... ............. . . ................... . ............... . . ... 65
5.1 Conclusion OfThe Study.......................... .. ....... . ............ ..... .. 65
5.1.1 Overall Observation Sample Period From Year 2005 To 2010 .. . · 67
5.1.2 Pre-Crisis Period From Year 2005 To 2007.. ................. . ... . 70
5.1.3 Post-Crisis Period From Year 2008 To 2010....................... 72
5.2 Summary Of Research Study And Theoretical Implication ............. . . 75
ix
CHAPTER 6: CONCLUSION 77-81
6.0 Introduction. . . . . . . .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .. .. . . . . . . . . . . . . . . . . ... . . ... 77 ~
6.1 Conclusion. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 77
6.2 Recommendation And Research Implication... . . . . . . . . . . .. . . . . . . . . . . . . . . ... 78
6.3 Limitation OfThe Study... ... ........ . ...... ... . ..... ... .. . ... .... . .... ..... ... 80
6.4 Future Research Direction...... . ...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 81
REFERENCES.............. .......... ................... ................. ... ......... ... 82
Appendix
,,'
x
LIST OF TABLES
Table 1.1 Summary of the Theories..................................... . ........ 9
Table 2.1 Summary of Literature Review........... . .................... ........ 32
Table 3.1 Summary of Expected Results ........ . .............................. 45
Table 4.1 Summary of Descriptive Statistic........ .............. .... .... ... ... 51
Table 4.2 Correlation Matrix.......................... . .......... .. ........... . ... 53
Table 4.3 Regression Result for the Stock Price Volatility (SPV) from year
2005 to 2010............... ............................................... 57
Table 4.4 Regression Result for the Stock Price Volatility (SPV) at pre-crisis
period from year 2005 to 2007... . . . . . . . .. . .. . . . . . . . .. . . . . . . . . . . . . . . .. 60
Table 4.5 Regression Result for the Stock Price Volatility (SPV) at the post-
crisis from year 2008 to 2010.......................... ................ 62
Table 5.1 Summary of the Empirical Findings...... ... ... ... ...... ... ... ...... 75
LIST OF FIGURES
Figure 1 Kuala Lumpur Composite Index (KLCI) Movement from Year 2000
until 2010................. . .. . . . . . . . . . . . . . . . . . . ..... . . . . . . . . . . . . . . . . . . . . .. 12
Figure 2 Conceptual Framework for the Study....... . ....... ......... ........ 38
Figure 3 Average of the Stock Price Volatility from the year 2005 to 2010
55
xi
CHAPTER ONE
INTRODUCTION
1.0 INTRODUCTION
Stock price volatility issue has attracted a lot attention since the last decades.
It has been discussed widely in developed and developing stock markets. The stock
price volatility is the systemic risk faced by investors who hold ordinary shares in
short term investment. The volatility of stock price is the movement of stock price
which is also a measurement of risk by representing the rate of change in the price of
a security over a given period (Guo, 2002).
Specifically, stock price volatility is measured by standard deviation which
presented dispersion of returns. Standard deviation is useful in measuring stock price
volatility because it summarizes the probability of the value of stock returns.
Volatility computed with the variance of a stock's price so if a stock is considered as
volatile, its price would dynamically over time. It brings uncertainty to what its
future price will be (Schwert, 2011).
01
Major of investors prefer to minimize the risk of their short run investments.
The lesser the risk, the better the investment is. On the other hand, the higher the
volatility of a given stock, the greater its returns are and vice versa. By nature, major
of the investors are risk averse. Thus, the volatility of their investments is important
to them in measuring the level of risk that they are exposed to (Kinder, 2002).
1
There is a study conducted of Mohamad and Nassir (1993) which was related
to the stock price volatility in Malaysia. The objective of their study was questioned
on how stock price volatility and firm value changes essentially was determined by
factors which are responsible for creating changes in the value of firms.
1.1 STOCK PRICE VOLATILITY AND DIVIDEND POLICY
The dividend policy is a firm policy of paying capital earnmgs as cash
dividend or retaining them for reinvestment in the firm. It is also the division of
profit earnings between payments to shareholders and reinvestment in the firm. The
components of the dividend policy. are dividend yield and payout ratio (Clayman,
Fridson & Troughton, 2008, p. 221).
Dividend policy remains mainly on discussion in academic that amid the
clouding picture of how its importance among the financial economists in the last
decade until today. The dividend policy of a firm becomes the choice of financial ,,'
strategy when investment decisions are taken. The discussion of dividend policy was
started by Modigliani and Miller (1958). According to their views, dividend policy
and firm's stock price volatility is irrelevant sorely based on its earning ability.
The time a company declares dividends, it is offering information to its
shareholders to forecast the earning ability of the company and financial position in
2
capital markets. The more reliable source of information are obtained the better
forecast will be obtained. There are a number of different researcher disagree about
the relationship of dividend yield and stock price volatility. Moreover, it is still
unexplained and considered as debatable discussion in corporate finance (Asquith &
Mullin, 1983; Miller & Rock, 1985).
From the several previous studies, it was said that stock prices are influenced
by dividend payouts (Mohamad & Nassir, 1993; Hussainey & Chijoke-Mgbame,
2010; Nazir, 2010). Gordon (1963) reported that the firm with large dividends faced
less risk in terms of stock price volatility in capital markets. Some of hypothetical
mechanisms also suggest that there is a universal relationship between dividend yield
and dividend payout ratio with stock price volatility.
A number of dividend theories exist as an attempt to explain of the influence
of corporate dividend policies on stock prices. These theories include the clientele
effect, the information or signaling effect, the bird-in-hand theory and the rate of
return effect (Hussainey, Mgbame & Chijoke-Mgbame, 2010).
Lots of work has been done on this. topic since last decade until today, but
almost all of the studies have taken stock price volatility as independent variables to
find out how it influences the dividend policy which is the dependent variable. The
study tends to examine the effect of dividend policy with consideration that dividend
yield and payout ratio as independent variables while the stock price volatility as the
dependent variable. For this case, the data of non-financial listed firms in Kuala
3
Lumpur Stock Exchange will be taken for examination because it takes Malaysia as
the sample population.
1.2 STOCK PRICE VOLATILITY AND LEVERAGE
The leverage is the use of the fixed cost of a company's cost structure. The
degree of leverage is an important component in assessing a company's risk and
capital return. Leverage increases the potential volatility of a company's earnings
and increase the risk of lending or owning the company. The greater the leverage is,
the greater the risk will be and vice versa (Clayman et aI., 2008, p. 173).
Stock price volatility and lev~rage might have a direct relationship because of
operating risk. Small finns are not supposed to be highly diversified in their
operations, so financial institutions and investors are also less interested in these
types of finns as well as less interested to analyze stocks of these small finns. This
could cause stocks of small finns less infonned in the market and become more
illicit. It leads to greater price volatility of their stocks. The leverage effects are ..
stronger for small finns as compared to large .finns (Cheung and Ng, 1992).
The studies of how financial leverage can explain the stock price volatility
was discussed by few previous studies. The empirical evidence argued that there was
a negative relationship between stock returns and volatility induced by financial
leverage based on a sample of large finns (Black, 1976: Christie, 1982). Schwert
4
,. Pusat Khidmat Maklumat Akademik UNTVERSITI MALAYSIA SARAWAK
(1989) shows empirically that financial leverage cannot fully account for the
influenced variation in market volatility.
The stock price volatility in the future is determined by leverage but not only
price. This proved by the study conducted by Aydemir, Gallmeyer & Hollifield
(2007). They said that there are two common economic explanations for the
leverage influence on stock price volatility. The first explanation is when volatility
rises and expected returns tend to increase. It will lead the stock price dropped. As a
consequence, volatility and stock returns are negatively correlated. The second
explanation is when stock prices fall and financial leverage tends to increase. It will
lead increases in stock return volatility.
1.3 THEORETICAL FRAMEWORK
The theoretical framework is to provide a guideline for the study. The study
is focus on the corporate theories which are in term of dividend policy theories and
capital structure (leverage) theories. Under the dividend policy theories are
Modigliani &. Miller Theory (M&M II) and ~ignaling Hypothesis. Besides, under the
capital structure (leverage) theories are Modigliani & Miller's Theory (M&M I),
Pecking Order Theory and Static Tradeoff Theory
5
1.3.1 DIVIDEND POLICY THEORIES
Modigliani & Miller Theory (M&M II)
Modigliani and Miller (1961) stated that the dividend policy is irrelevant to
the shareholder because stockholder wealth remains same if all elements of
investment policy are standardized. If there is any increase in the current payout, it
would be financed by fairly priced stock sales. Thus, there is no influence on a
company cost of capital or shareholder wealth due to the existence of perfect market
which has no transaction cost and taxes. Besides, the theory stated that the investors
are rational in valuing the equity with the value of discounted future cash flow to
investors. Moreover, manager is the best agents of shareholders. There is perfect
knowledge of future cash flows for the investment policy of the finn.
Signaling Hypothesis
Pettit (1972) mentioned that the signaling hypothesis was against the
Modigliani and Miller theory (1961) which mean that there is perfect knowledge
about a finn of investors. For the Malaysian stock market, there is imperfect market.
Thus, Modigliani and Miller theory is not suitable to use on our country. The insiders
of the finn tend to have more accurate and timely infonnation about the finn than
outsiders. Therefore, there is a gap between managers and investors. To tighten this
gap, managers use dividend as a signal of private infonnation to the shareholders
(AI-Malkawi, 2007). From the signaling hypothesis, the numbers of dividend paid
6
seem to bring up good infonnation about the perfonnance of a finn with evidence
from the volatility of stock price. When dividends accumulate may be interpreted as
good signal and this will cause the stock price movement of the finn to be stabilized.
1.3.2 CAPITAL STRUCTURE (LEVERAGE) THEORIES
Modigliani & Miller's Theory (M&M I)
The assumption of Modigliani & Miller's theorem (1958) stated that the
capital structure irrelevance proposition is under the condition of no taxes, no
transaction cost and no bankruptcy costs where the stocks are traded in a perfect
capital market. Thus, the market value of a finn does not influence by the capital
structure of the finn (Modigliani & Miller, 1958). Besides, in a perfect market M&M
theorem stated that the capital structure is irrelevant and has no impact on the
company's stock price (Clayman et aI., 2008, pp. 194-195).
The Pecking Order Theory
The pecking order theory developed by Myers and Majluf (1984) argued that
managers select financing method for sources of funds which benefits to the
shareholder. They will try to avoid issuing new share to public because this will
decrease the right to control the finn. The visible method is retaining earning which
represent internal financing would be first to use as the investment fund. Then, the
7
sources of funds would be signals up the scale to the leverage if the internal
financing is insufficient. Moreover, the last financing decision would be the most
visible method which is public offerings of new equity. Assume that there is the
condition where the internal financing is insufficient; managers prefer debt than
issuing the new equity to public. Thus, the increased leverage level of the firm will
cause the shareholders anxious. This will cause the stock price volatility of the firm
to increase (Clayman et ai., 2008, p. 202; Shyam-Sunder & Myers, 1999; Chirinko &
Singha, 2000).
The Static Tradeoff Theory
Modigliani & Miller's (1958) said that the static tradeoff theory which is
given the assumption that there are advantages to leverage within a capitalist
structure up until the optimal capital structure is reached. The theory recognizes the
tax deductibility of interest payment. The static tradeoff theory against the M&M
irrelevance theory is from the difference of potential benefit from debt in a capital
structure. From the theory, the leverage benefit comes from the tax deductibility of
the interest payments. Since the M&M irrelevance theory assumes there are no taxes.'
on perfect market, this benefit is not recognized. This theory is emphasized on
leverage benefit for the firm. Thus, the stock price volatility will be stabilized when
the level of the leverage is increased (Clayman et ai., 2008, p. 203; Quirt, Dallocchio
& Salvi, 2009; Shyam-Sunder & Myers, 1999; Chirinko & Singha, 2000).
8
Table 1.1: Summary of the Theories
Theories Definition
JUvjideDd Policy Theories
Modigliani & Miller • The dividend policy is irrelevant to the shareholder Theory (M&M II) because stockholder wealth remains same if all elements of (1958) investment policy are standardized.
• There is no influence on a company cost of capital or shareholder wealth due to the existence of perfect market which has no transaction cost and taxes.
• The numbers of dividend paid seem to bring up good information about the performance of a fum with evidence from the olatility ofstock price.
When dividends accumulate may be interpreted as good signal and this will cause the stock price movement of the firm to be stabilized.
Capital Structure (Leverage) Theories
Modipani& Miller's Theory (M&M I) (1958)
• The capital structure irrelevance proposition is under the condition ofno taxes. no transaction cost and no banlcrupk.:y costs where the stocks are traded in a perfect capital marke
The market value ofa firm cb;s not influence by the capital sttucture ofthe finn
The Pecking Order • The managers select financing method for sources of funds Theory (1984) which benefits to the shareholder.
• The increased leverage level of the firm will cause the shareholders anxious.
'lbe Static T~tt • Emphasized on the leverage benefit for the finns. TIhearry(19S8)
• The stock price VQlatility will be stabilizecUfthe leverage increased.
Adopted from: Modigliani & Miller (1961), Pettit (1972), Modigliani & Miller (1958), Myers & Majluf (1984).
9
1.4 BACKGROUND OF THE STUDY
AU investors tend to maximize their expected return at some preferred level
of risk in their investment. However, there is an assumption of higher risk higher
return in the financial market, so this means that the economic condition and factors
of the volatility in the financial market is very important for investors to analyze
investment's potential. Most investors prefer to invest in the stock market because
stocks have high liquidity and are volatile all the time. Common stocks are the most
common instruments used by the investors to earn capital gains and dividends at the
same time.
For investments in stock, only a part of investors know more about the
factors influencing the stock price ~olatility in the stock market. Thus, investors
should collect more information from various sources such as dividend policy,
leverage, working capital management, asymmetric information, and ownership
structure of particular firms to determine its factors. Besides, investors and other
parties such as stockbrokers, investment analysts, fund managers and stockholders
may overestimate or underestimate the stock price based on the current or previous
stock price v~latility. However, there are sev~ral issues that are related to economic
condition in Malaysia and around the globe which influence the stock price volatility.
Moreover, at the international financial market stock price volatility in the
S&P 500 Index was appreciated from 13.4% during the pre crisis period (Jan'05 to
Mar'08) to 43 .6% during the crisis period (Mar'08 to Mar'09) and revert to 20.9%
10
again in the post crisis period (Apr'09 to Nov'09). This research shows that the stock
price volatility was increased during the crisis period and revert at post crisis period
but did not revert back to the pre crisis level (Manda, 2010). However, she also
mentioned that there are many market investors still expecting higher volatility
despite of the rally in financial market.
The financial crisis during the late 2008 was a major disruptive impact of
financial market around the world. The U. S. Financial Index's volatility of the
returns was much higher between the periods at July 2008 to May 2009 which was
lead by credit crisis in 2008. The investors have difficulties in making investment
decision due to the instability financial market during global financial crisis 2008
(Schwert, 2011). On the other hand, investors are willing to take risk to draw higher
income because of the assumption of higher risk higher return.
Angabini and Wasiuzzaman (2011) argued that the Asian financial crisis in
1997 has brought a big negative impact for financial market in the South East Asian
countries. Due to the Asian currency crisis, the stock prices burst in Asian countries
especially Thailand, Malaysia, Indonesia and Korea. However, from the beginning of
the 20th century onward, the stock prices aroun,d the world have appreciation trends
until the global financial crisis occur. They said that Malaysia shows a good recovery
trend on KLSE in the middle of 1999. There is no actual date for the full recovery
economies around the world. Between the recovery periods from 2004 to 2007, the
financial market was very calm (Manda, 2010).
11
Figure 1.1: Kuala Lumpur Composite Index (KLCI) Movement from Year 2000 until 2010
1600
l.JOO
1200
~ 1000'= .e
SOO
600
.JOO
~oo --- ...-.---..-.--..---.-.---.----.-.--.---..... - .-..-.-------
...---.--..-.--.. ~..---- 0 0 ... , <'", ...... -. ..... ..,. ..,. or , .,., ·r• '0 ,-- r- oo 00 00 ~ 0'. <:> 0
-.-~.--- .-- ---
0 8 -C> 8 C> C> <=> C> C> 0 <=> o · C> <:> C> 8 C> C> <=> <:> 0 0 <:> 0 0 <:> 0 <:> 0 0 <:> <=> <:> 0 <0 <=> 0 0 <:> <=> <:> C> <:> <=> 0 <:> 0 <:>r -·t ("'. .~'I ... , .~I ... , ... , ..., !':.' ....'"" ~~ ~~ ~ .' !"' r:,:..' !,~.I .~ I !: .~ ~ I !:..' .~
!:.,I r.~1 !:,,' !"t- ....:. --·A, ;-< ....:. " " ~ ·r::. ;"1 -v. ~ ~ ~ 0 - ~ - -C\ ;:. i::: (.: ~1 or, 6 - ~ - 00 .,0 - -;;,: ~ -;';'~I r --"· -
Monthly
Sources: Thomson Datastream Database
From the Figure 1, the stock price in Kuala Lumpur Composite Index (KLCI)
is highly violated from the period 2007 to 2009 due to the global financial crisis
happened in the period at the end of 2007 and beginning of 2008. This caused a huge
effect on all financial markets at global. The stock market in Malaysia was not an
exception. The liquidity shortfall in the United State banking system is the main
factor that caused this global financial crisis. The impacts from this period on the
financial market around the world are bank solvency, damaged investor confidence
and declines in credit availability. Thus, it affects the securities to suffer large losses
after this period where during late 2008 and early 2009.
Malaysia is one of the countries that suffered from this financial crisis impact.
The KLCI was dropped 45% for the period January 2008 to September 2008
12
(Angabini & Wasiuzzaman, 2010). They concluded that due to this financial crisis,
there were several occurrences of the appreciation in news' effect about stock price
volatility in Malaysia. This study is examining the situation of stock price volatility
in Malaysia during two periods which are before the financial crisis (2005 to 2007)
and after the financial crisis (2008 to 2010). Besides, the study is also investigating
the possible effects that influence the stock price volatility during those two periods.
1.5 PROBLEM STATEMENT
Although the stock price is listed as financial data on the stock market, it
does not show that all investors or stockholders will know much about what to
determine the changes in stock prices and how volatile the stock markets are. With
the high risk, stockholder should get the highest return. In contrast, higher risk may
also cause the higher chance of losing money. Thus, determining the factors
influencing the volatility of stock prices are very important for investors or
stockholders to do forecasting on the future market risk.
Most investors are risk averSIons who avoid taking risk when making
investments. If they have the right to choose between two underlying assets with
same return, they will naturally choose the lower risk by naturally. However, not
everyone is risk averse so they will try to get more accurate financial information to
take risk for higher returns (Brown and Reily, 2009). Thus, it is important to know
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