Price, Volume and Liquidity Effects of Stocks Entering and Leaving Jakarta Islamic Index

49 Pages Posted: 15 Feb 2014

Date Written: February 15, 2014

Abstract

Previous studies have documented that price and liquidity effects are associated with changes in stock market indices due to bankruptcy, mergers, or tender offers. This study investigates price, volume and liquidity effects of stocks entering and leaving Jakarta Islamic Index (JII) for different reasons such as Sharia compliance, changes in market capitalisation and liquidity have the same impacts. We find that stocks entering JII earn positive and statistically significant abnormal return on the first day after the announcement day and experience a positive significant change in trading volume activity (TVA) on the first day after the announcement day. This result is consistent with price pressure hypothesis recorded in prior work (Chen, Noronha & Singal 2004; Harris & Gurel 1986). Another interesting aspect of the present study is that we use the liquidity proxy of bid-ask spread derived from the methodology of Corwin and Schultz (2012) with daily high and low prices before and after announcement date to discern the effect of liquidity improvement. We find that for entering stocks the post announcement spread starts decreasing significantly from about the third day. Our results remain robust to the use of alternate proxies for liquidity. Overall, our results suggest that investors’ decision to buy stocks is driven more by the performance of stocks and less by its ethical compliance.

Keywords: JII, stocks entering and leaving, price, volume, spread, ethical compliance

JEL Classification: G12, G14

Suggested Citation

Listyaningsih, Erna and Krishnamurti, Chandrasekhar, Price, Volume and Liquidity Effects of Stocks Entering and Leaving Jakarta Islamic Index (February 15, 2014). Asian Finance Association (AsianFA) 2014 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2396294 or http://dx.doi.org/10.2139/ssrn.2396294

Erna Listyaningsih (Contact Author)

Malahayati University ( email )

Jl. Pramuka No 27
Kemiling
Bandar Lampung, Lampung 35153
Indonesia
+62-721-271112 (Phone)
+62-721-271119 (Fax)

HOME PAGE: http://www.malahayati.ac.id/

Chandrasekhar Krishnamurti

University of South Australia ( email )

37-44 North Terrace, City West Campus
Adelaide, South Australia 5001
Australia

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