Department of Finance College of Management National Central University
Abstract:
This paper examines local market reactions to the constituent changes in the MSCI Taiwan Index. We find that abnormal returns are significantly positive for additions and significantly negative for deletions. Foreign investors tend to purchase the shares of stocks added to the index, and sell the shares deleted from the index. Individuals and corporate investors provide the liquidity demanded by foreign investors. The result implies that the MSCI Standard Index is an important benchmark for cross-border investments. We also find that foreign investors have a positive abnormal return on additions and a negative return on deletions, while individual investors have an insignificantly negative return on additions, but their return on deletions is significantly positive. Our results are consistent with the view that individuals provide excess liquidity to foreign investors on additions, but deletions suffer a shortfall in liquidity around the announcement and effective dates; thus individuals are only compensated on deletions.
