Literature Study and Hypotheses Development Announcements and Return

2014 about the possibility of return distribution. In his research, Beaver 1968 discovered that there is a dramatic increase in the trading volume and the variability of stock return during the week of earnings announcements. The variability of stock return is 67 higher during the day or the week of earnings announcements than non earnings announcements. Watt 1978 examined using quarterly financial statements. He concluded that information contents of quarterly financial statements could be captured more perfectly by the market than annual financial statements. His research results show that there is abnormal return after quarterly earnings announcements showing weak market form. Foster 1977 also studies the interim and annual earnings announcements, and then shows abnormal return variance for two days since the earnings had been announced. Morse 1981 investigates the price and trading volume volatility during a few days around quarterly and annual earnings announcements at Wall Street Journal WSJ. The sample used in this research includes daily volume data and daily stock price during four years of 1973-1976 for the stock traded at NYSE 20 stocks and ASE 5 stocks, and the stock traded at OTC. The results show that price volatility and trading volume increase before and during earnings announcements date at Wall Street Journal. The activity before the announcements date at WSJ may occur because the public announcements are misjudged. They are actually announced using broad tape on the day before WSJ issued. Similar to earnings announcements, the MA announcements can influence the stock price, either acquirer firm or target firm. The stock price variability of both firms reflects the stockholders‘ wealth level acquired from εA announcements. The stockholders‘ wealth level is measured by abnormal return acquired by acquirer firm and target firm. Parkinson Dobbins 1993 showed positive and significant abnormal return during 24 hour periods after bid announcements. The stock price of the target firm increases during acquisition announcements and acquisition process, meanwhile the investors of target and acquisitor firm gain high returns. Therefore, it could be conc luded that stockholders‘ wealth increases by merger. Limmack 1991 studied the merger consequences to the investors‘ wealth level by examining the gains distribution to merger firms‘ investors. The results show that, even there are no totally decrease of their investors‘ wealth as a result of company acquisition, the acquirer firm could experiences a decrease in their investors‘ wealth level. Inversely, the wealth of target firms‘ investors could increase significantly. Ghosh Lee 2000 argued that abno rmal return is correlated to target firms‘ performance which serve as underlying acquisition motives. The results finds high abnormal return for the target firm. Leeth Borg 2000 suggests that target firms‘ investors during 1λβ0s gained abnormal return from this acquisition more than 15. Song Walkling 2000 examined the merger effort sign which influence the non target firms in the same industry as the new target firm. The examination results shows that non target merger and acquirer firms get abnormal return around MA announcements. Even though, abnormal return of non target firms are less than target firm. This is caused by the possibility that nontarget firms would become the next acquisition target. Harris Ravenscraft 1991 studied stockholde rs‘ wealth of 1β7γ firms in USA who do acquisitions since 1970 until 1980. The results show that for firms with intensive industry research and development, cross border acquisitions took place more frequently than domestic acquisitions. This research conf irmed that target firms‘ wealth those are foreign firms are higher compared to the target which are domestic firms. Maquieira, Megginson Nail 1998 studied 260 mergers which did the merger payment using stock from 1963 until 1990, and finds that merger paid with stock did not produce financial sinergy or stockholders‘ benefit. Amihud, Lev 2015 Travlos 1990 examined motivation which become the consideration to control other firms through investment paid by cash, debt or stock. The firm‘s values are reflected in investment paid using cash, debt, and stock. They documents that firm acquisition whose managerial ownerships are high tend to pay using cash. Additionally, negative abnormal return for the acquirer is related to payment using firms‘ stock whose managerial ownerships are low. Based on previous research described above, the hypothesis is formulated as follows. H 1 : The MA announcements induce positive abnormal return Announcements and Return Volatility The stock price volatility begins with inves tors‘ assets re-evaluation. The re-evaluation process is conducted by estimating the expected income and risk to determine stock intrinsic value using most recent data. The result is then compared to the actual price to evaluate the price fairness. Based on this fairness evaluation, the decision to buy or to sell stock is made. There are two sides who have contradictive aim, namely the stock buyer who wants price increase after trading and the stock seller who wants price decrease. This contradictive aim causes stock price volatility. Each time the price has been concluded, then during the same time the balance between stock bid and ask occurs. The level of stock price volatility is comparable to stock intrinsic value fluctuation, and the information acquired by investors affects the stock price re-evaluation. Therefore, the stock price volatility can not be separated from new information acquired by investors. Public announcement is information recognized at the same time as the price is affected, before anyone can use it as trading strategies French Roll, 1986. The public information signal is available for all traders but considered differently by various traders Odean, 1998. The informed and non-informed investors trade, only when there is new information about future stock cash flow or about other variables such as wealth, preference, and investment opportunity. The investors‘ reaction against information occurs when information produced price change that reflects the investors‘ expected risk and benefit Berry Howe, 1994. Nofsinger 2001 studied the trading behavior of institutional investors and individual investors after firm specific information released by Wall Street Journal and macro- economics announcements. The investors tend to watch the released firm specific information especially about earnings and dividen. The institutional investors and individual investors buy stock after good economics news and sell them after bad ones. This phenomena show that public information released by Wall Street Journal and macro-economics announcements are greatly influence stock price volatility. Balduzzi, Elton Green 2001 signified that the impact of most public informations occur very fast during 1 minute or less. Frino Hill 2001 supported this signal. They state that the stock price behavior is greatly affected by public information announcements at Sydney Future Exchange SFE. Price volatility, trading volume and bid-ask spread analysis indicates that adjustment to new information occurs very fast. The impact of announcements can be detected within 240 seconds. The bid-ask spread impact has shown within 20 seconds before and 30 seconds after public information. The increase of bid-ask spread is closely correlated with price volatility, which indicates market response against public information. Therefore, this research hypothesized as follows. H 2 : The MA announcements affects positively the level of return volatility The Impact of the Announcements to Trading Volume 2016 The studies examining the relationship of price, trading volume and information are presented in studies by Bamber 1986, Barclay Litzenberger 1990, Jain Joh 1988, Morse 1981, and Winsen 1976. These studies found the relationship between trading volume and released information. Every new information is followed by trading volume increase that definitely affect stock prices. The reason is that released information can be either good news or bad news, the price change can be negative or positive, but the trading volume never negative. The trading volume provides the intensity clue of an occuring stock price variability. The low trading volume is the characteristic of doubtful expectation that typically occurs during consolidation period the period when the price change side within trading session. The high trading volume occurs when there is strong consensus that prices shift higher. The trading volume is a proxy of information inflows velocity, that affect stock price at the same time. The investors who have information do trading based on their acquired information. The more transaction done, the higher volatility is Kyle, 1985; Admati Pflederer, 1988. The investors who have information tend to trade more actively. Therefore stock price volatility rises after information disseminations. Kyle 1985 explained the private information is formed by the end of trading day during which private information disseminated. The return variance during every interval reflects new information. Admati Pfleiderer 1988 signified that two important motivations of trading at stock market are information or liquidity. Furthermore, the informed traders do their trading based on information that not every trader has. Whereas the liquidity traders trade without directly related to return on asset level in the future. Including within this category is big traders such as financial institutions, who their trading is conducted by showing the client need or in order to balance their portfolio. After the clasification of the two types of traders, it is shown that both types of traders choose to trade when the market is during thick transactions, that is when their trading has little influence against stock prices. The concentrated attention to the similarity of stock price and trading volume reactions because of published information tend to make researchers to consider them as the substitute of market reaction measure Bamber Cheon, 1995. This is because lots of previous studies found that published information causes stock price and trading volume reactions. Karpoff 1986 stated that even though investors give similar interpretation about public announcement, but trading could occur when investors have different expectation. The different expectation causes stimulation to trade by releasing their speculative shares. Holthausen Verrecchia 1990 concluded that an announcement that contains information content can change investor‘s belief, so that the investors do trade. When the different interpretation was constant, new information release is not expected to revise investors‘ belief. This different interpretation is adequate to motivate the investors to trade. The trading volume is an increasing function of the absolute price change, which is reflected in the information availability Holthausen Verrecchia, 1990. The stock trading may occur when the investors have different accuracy against private information. Pre-disclosure information asymmetry causes the investors to develop pre-disclosure beliefs by differentiating the degrees of confidence. The difference occurs within the weight of public announcement causes the different investors‘ belief revision and finally causes the trade. Beaver 1968 disclosed that, if correlated with stock trading volume, published financial statements events could have information content when the stock number is bigger during earnings announcement compared to the other times during the year. Therefore, it can be concluded that the information content causes the traded stock volume becomes relatively more when an event occurred. This happens if the announcements were bad news. Meanwhile, because 2017 this research is limited to MAn announcements event good news, then this research hypothesized as follows. H 3 : The MA announcements influence abnormal trading volume positively Insider Trading Begin with the study by Ball Brown 1968 which signified strong support that investors react against earning announcement. The firms‘ employee, the board of directors and other insiders has more information than public who only has a chance to gain abnormal return based on information released by the firms. Furthermore, the insiders with special access to earnings information have capability to predict expected earnings and finally are able to trade with more trading volume. The special access to earnings enables the insiders to trade based on earnings information Park, Jang Loeb, 1993. Jaffe 1974; Finnerty 1976; Baesel Stein 1979; Givoly Palmon 1985; Seyhun 1986; Fowler Rorke 1988; and Allen Ramanan 1995 concluded that there is relationship between insider trading and published earnings announcement. The insiders do their trading activity based on information captured earlier about future events, such as merger, earnings, and dividend announcements. The insiders sell buy is not a perfect prediction to be considered as good bad news Allen Ramanan, 1995. Givoly Palmon 1985 signified that there is a probability of insider trading during their market action to gain excessive return and at the same time, they spread the information about long term prospect of the firm. If insider trading provided certain information, then there is big probability that the market evaluate the firm condition information disclosure. This prediction has been investigated empirically which signified that the insiders are able to acquire abnormal return when trading and at the same time they spread estimated earnings information Penman, 1λ8β. The firms‘ decision to sell stock is considered profitable by the market when the buying by insiders occurs within six months before announcement Hirschey Zaima, 1989. The market responds the dividend announcements more negatively when there is selling by the insiders first John Lang, 1991. The market reaction against the bankruptcy announcements are more negative for the firm when there is a significant and big proportion of selling by the insiders Gosnel, et al., 1992. The market responds more positively to buy back stocks when there is buying by the insiders first Lee, et al., 1992. The inference concluded from all studies above is that there are information leakage evidences before announcements event. This condition can be considered as insider trading evidence. Insider trading may be conducted by either domestic or foreign investors. This study differentiate the investors types as domestic and foreign investors to determine whether all types of investors or certain type of investors commit insider trading. This condition is confirmed if return variance during the period before announcements event is related positively and in one way with return variance during the following period. Subsequently, the return variance during the following period is related positively and in one way with return variance during the next following period. As a note, the term in one way refers to return variance which influence following return variance, and not vice versa. Therefore, the hypothesis can be formulated as follows. H 4 : The return variance during preceding window periods is related positively with return variance during the following periods, within consecutive lag, sugesting insider trading 2018

2. Research Method

This study uses transaction data from the Indonesian Stock Exchange IDX. The IDX has begun automation since May 1995 using JATS Jakarta Automated Trading System. The transaction data record each transaction at IDX since May 1995. The informations recorded at data are such as time stamp, stock code, transaction number, order number, transaction value, transaction price, buy or sell code, investor‘s identity foreign or domestic, stockbroker code, stockbroker‘s identity foreign or domestic, and transaction board for example regular, negotiation. There is no information whether the transaction is done by the institution or individual. The foreign or domestic identity is recorded before economics crises during 1997. Indonesia applied a policy that foreign ownership is limited to 49 of outstanding stocks. This limitation has been abolished during mid 1λλ7. However, foreign or domestic investors‘ identity recording is still ongoing until recently. To make the study direction clearer, this study uses 45 most liquid stocks at IDX stocks included within LQ45 index. This sample is selected because foreign investors have greater possibility to trade stock with big capitalization and with high liquidity Kang Stultz, 1995. This research is an event study, which study market reaction against event of which information is published as an announcement. The event study can also be used to examine the information content of announcement and to examine market efficiency form. Furthermore, this study is aimed to examine market reaction between foreign and domestic investors against announcements published by the firms. This reaction is measured by return as the value of stock price change or abnormal return. This research uses market model with estimated window periods of 91 trading days based on stock price observation within 80 days before announcement and 10 days after announcement. The research sample is the firms those did public MA announcements based on purposive sampling method. Research sample is stocks listed at IDX and fulfill the following criteria, 1 the sample is all stocks traded during research period, 2 did not apply stock split policy during observation period, 3 did not announce other policies such as right issue, bonus, or other corporate events during window period, and 4 identify transaction which stocks were originally held by foreign and domestic investors. This research uses public company secondary data listed at IDX during 1999-2007. The collected data include transaction data, transaction clearing data, firm type, stock identification, price, trading volume, trading value, time stamp, stockbroker, stockbroker origin, and investors‘ identity foreign and domestic. The analysis methods used are differentiated according to hypotheses examined. Hypotheses H1 and H3 are examined using the following stages return examination notation P is replaced by TV trading volume to calculate abnormal trading volume. First, this research adjusts the return calculated using the following formula 1 1 ,     t t t t i P P P R , where R i,t0 is the adjusted stock return day t ; P t is stock price day t; P t-1 is stock price before day t. Second, determine abnormal return calculated using the market model. The estimated periods used to develop  and  parameters is 120 days. The window period is day –45 until +45 with total t equals to 91 days. The market model is used with the formulation AR it = R it –    mt it R   , where AR it is abnormal return of security i during the event period; R it is actual return of security i during the event period;    mt it R   is expected return of security i. Third, calculate the mean 2019 abnormal return MAR using the formula MAR t =   N i it AR N 1 1 , and calculate the mean cumulative abnormal return MCAR using event period with the formula MCAR t-s,t =      N i q i t s t q AR N 1 , 1 . Fourth, statistical test t-test is conducted to determine the statistical significance of stock price change which has been adjusted to stock split. The standardized mean of abnormal return of security i SMAR i is the calculated t-value for security i. The standardization is conducted by dividing the abnormal return value with the standard error of estimation SEE which SMAR

i,t

= i t i SEE AR , . The standard error of estimation SEE is calculated using the SEE ,t formula which similar with the SEE i =       2 1 2 2 1 1 1 t t j m mj m mt R R R R T with SEE

i,t

is standard error of estimation of security i during day t within event periods; SEE i is standard error of estimation of security i; R Mt is market index return during day t within event period; R Mj is market index return day j during estimation period; M R is mean of market index return during estimation period; and T1 is the number of days within estimation period. The next, the value of SEE i is calculated using the formula SEE i = 2 1 2 1 \ 2 , ,    T R E R t t j j i j i with SEE i is standard error of estimation of security i; R i,j is return of security i during day j within estimation period; ER i,j is estimated return of security i during day j within estimation period; and T1 is number of days within estimation period, namely from day t 1 until day t 2 . To examine hypothesis H2, this study uses the absolute value of return compared to observed event. This study hypothesized that the absolute value of return is higher during window event compared to normal period. The examination procedure uses nonparametric mean rank of return Corrado, 1989; Bhattacharya, et al., 2000. This examination does not use normal distribution assumption, but focus on value rank instead. The examination stages are as follow. First, each stock i is ordered from 91 observation days using the absolute value of residual by descending order. Second, calculate the value of µK for window event day t -1 until t +2 using              N i t it K N K 1 2 1 5 , 45 1  . Third, calculate the standard deviation K  during the 91 days event periods which are -80 th day up to +10 th day using following formula:               10 80 2 1 5 , 45 1 91 4 t N i it K N K  . Fourth, examine the calculated-t against absolute value of residual during the window event which is equal or unequal to the event period. The formulation is K K T    . To examine the hypothesis H4 as the clue of information leakage or the indication of insider trading, this study uses the method by Bhaattacaraya, et al. 2000. First, we develop window period lag 1, 2, 3, 4 and 5. Second, this study conducts two regression tests to estimate statistically significant return variance as the clue of information leakage. The tests are