Draft: Work in progress Please do not quote

Working Paper: 06-01

The effects of Index changes in the Hong Kong and Singapore stock markets

February 2006

S. Gowri Shankar and Dipinder S Randhawa* Work in progress: This paper is being extended to incorporate the behaviour of market analysts. Specifically we ask whether analysts provide more ‘optimistic’ forecasts following inclusion of a stock into the index, and conversely if the forecasts have a downward bias after the deletion of a stock from the index. The questions of the number of analysts tracking the relevant stock and the role of mutual funds tracking the index are also addressed. S. Gowri Shankar Assistant Professor University of Washington, Bothell Business Administration Program 18115 Campus Way NE, Box 358533 Bothell, WA 98011-8246 Phone: 425-352-5498 shankar@u.washington.edu (Corresponding author) Dipinder S Randhawa* Saw Centre for Financial Studies NUS Business School National University of Singapore Singapore 117592 Phone: (65) 6516-4944 bizdsr@nus.edu.sg

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The effects of index changes in Hong Kong and Singapore stock markets

Abstract

We study the price and volume effects of changes to the Straits Times Index and the Hang Seng Index – indices for the stock markets in Singapore and Hong Kong. We find an asymmetry in the responses in the two markets. The Hong Kong market reacts positively, albeit temporarily, to news of additions to the index, reflecting pressure on prices of concerned stocks. Trading volumes exhibit commensurate significant changes. On the other hand, the Singapore market does not demonstrate any abnormal price or volume effects in the aftermath of index changes. While this finding warrants further examination, it suggests that price changes stem from demand supply disequilibrium rather than perceptions of new information signalled by changes in the index.

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The effects of index changes in Hong Kong and Singapore stock markets

Changes in the composition of stock market indexes have been found to have

significant effects on the prices and trading volumes of stocks affected by the changes.

Several studies have shown that stocks added to (deleted from) the index experience price

and volume increases (decreases) following announcement of the index change. In one sense

these results are not surprising given that index inclusion (exclusion) leads to an excess

demand (supply) for the included (excluded) stock from the large number of index funds that

track these indexes and this excess gets reflected in price and volume changes. However,

these effects have long puzzled researchers because, in efficient markets, the inclusion or

deletion of a stock should not affect prices if index changes do not signal new information.

Shleifer (1986) argues that these observed effects suggest that the demand curves for stocks

slope downwards, rather than the horizontal demand curve posited by the efficient market

hypothesis (EMH). Harris and Gurel (1986) report that the price and volume effects are

temporary and conclude that long-run demand curves are horizontal. Several recent studies

suggest that the price and volume effects may, in fact, result from the new information

signalled about the firm’s future prospects. Other explanations proposed to explain the price

and volume effects include changes in liquidity and investor awareness.

The research on this topic has focussed primarily on US market indexes, in particular

the S&P 500. Very few studies have considered index changes outside the US and even

fewer have addressed the issue in the context of Asian markets. This study carries out a

comparative analysis of the effects of changes in the main market indexes in Hong Kong and

Singapore, two of the most effectively regulated and stable financial markets in the region.

The Hong Kong and Singapore stock markets offer a different institutional context to test

these effects. Unlike US market indexes, the Hang Seng Index (HSI) of the Hong Kong stock

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market and the Straits Times Index (STI) of the Singapore market are not tracked by a large

number of index funds; the HSI is tracked by three funds and the STI by one fund, all of

which have been initiated only recently. Thus it would be of interest to examine if the effects

of HSI and STI index changes differ from those observed in case of widely tracked indexes

such as the S&P 500 and, if so, the potential explanations for the differences.

The HSI is a market-capitalization weighted index for the Hong Kong Stock

Exchange. It is maintained by HSI Services Limited, a wholly owned subsidiary of Hang

Seng Bank, the second largest bank in Hong Kong. The HSI reflects daily prices of the 33

largest companies of the Hong Kong stock market that together account for 70% of the

capitalization of the Hong Kong Stock Exchange. Firms are selected for inclusion in the HSI

based on their (i) market capitalization and turnover rankings, (ii) financial performance and

(iii) representation of the respective industry sub-sectors within HSI. In December 2005, the

HSI was tracked by two large exchange traded funds; the Tracker Fund of Hong Kong

(launched in 1999) with assets in excess of HK$ 28 billion and the HSI-ETF (launched in

2004) with assets in excess of HK$9 billion. In addition to these ETF’s, participants in the

Hong Kong SAR workforce who contribute to the Mandatory Provident Fund scheme also

have the option of investing their retirement savings in an index mutual fund that tracks the

Hang Seng Index.

The STI is also a market-capitalization weighted index comprising the 50 largest and

most actively traded stocks on the Singapore Exchange. It was constructed and is actively

managed by the Singapore Press Holdings, a large media conglomerate in Singapore; the

primary objective of the index is similarly to chart the performance of the stock market

through an aggregation of daily prices of stocks included in the STI. The STI constituent

stocks account for 60 per cent of the average daily traded value and over 75 per cent of the

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total market capitalisation on the Singapore Exchange. The only fund to track the STI so far

is the streetTRACKS STI (launched in 2002) which had assets worth about S$ 0.5 billion at

the end of 2004.

When indexes are not tracked by a large number of funds, we would expect that an

index change would not cause an imbalance in demand and supply of the relevant stocks,

thereby affecting prices. In such a situation, a significant price reaction would have to be

ascribed solely to the information signalling effect of index changes. On the other hand, a

lack of reaction here would provide strong support for the hypothesis that index effects

reported in other markets are caused by excess demand. Thus, the results of this study, while

contributing to the literature on the Hong Kong and Singapore stock markets, will provide

some new insights as to why index changes cause price and volume reactions in markets all

over the world. In the next section, we briefly review the literature on index change effects in

the US and elsewhere. In subsequent sections, we describe our data and methodology. The

final sections present our results and conclusions.

Table 1: Market Capitalization to GDP (2003)

US$ Millions Exchanges Market Capitalization GDP Ratio

AMEX / NASDAQ / NYSE $ 14,266,023 $ 10,400,000 1.37 London $ 2,460,064 $ 1,520,000 1.62 Tokyo $ 2,953,098 $ 3,550,000 0.83 Hong Kong $ 714,597 $ 186,000 3.84 Singapore $ 148,503 $ 105,000 1.41 Australian $ 585,431 $ 528,000 1.11 Jakarta $ 54,659 $ 663,000 0.08 Korea $ 298,248 $ 931,000 0.32 Kuala Lumpur $ 160,970 $ 210,000 0.77 India $ 531,556 $ 2,660,000 0.20 New Zealand $ 33,050 $ 78,800 0.42 Philippine $ 23,190 $ 356,000 0.07 Taiwan $ 379,060 $ 406,000 0.94 Thailand $ 119,017 $ 429,000 0.27 Source: World Federation of Exchanges, www.world-exchanges.org

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Literature Review

Several hypotheses have been proposed to explain the price and volume effects in

response to the inclusion or deletion of individual stocks from market indexes. All these

hypotheses have been proposed in the context of changes to the US market indexes, and

except where noted below, the studies have almost exclusively examined changes in the S&P

500 index.

Price Pressure Hypothesis: The temporary price pressure hypothesis posits that

inclusion of a share leads to increased demand for that share by funds managers tracking the

index. Conversely when a share is deleted from the index, demand falls leading to a fall in

the price. In efficient markets, other buyers/sellers will step in to absorb the excess

demand/supply and, in the absence of any other information, the price effects should be

temporary. Harris and Gruel (1986) find support for the price-pressure hypothesis with their

study of S&P 500 index changes. Similarly, Biktimirov, Cowan and Jordan (2004) examine

Russell 2000 index changes and find that the abnormal gains at reconstitution are reversed

soon after, as predicted by the price pressure hypothesis.

Imperfect Substitute/ Downward Sloping Demand Curve Hypothesis: Implicit in the

idea of a perfectly elastic demand curve for stocks is the belief that stocks have perfect or

near perfect substitutes. However, investors do have preferences for local stocks, for regional

and national companies. Shleifer (1986) contends that the absence of perfect substitutes for

shares results in downward sloping demand curves as investors are price sensitive and

demand a premium to substitute their holdings for less ‘desirable’ stocks. In this scenario, the

announcement day price effects would be permanent. Shleifer (1986), Jain (1987) and

Dhillon and Johnson (1991) all examine S&P 500 index changes over various periods and

find that the announcement day effects are permanent; they do not find any evidence of price

reversal after index changes are effected.

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Liquidity Hypothesis: Harris and Gurel (1986), Beneish and Whaley (1996), Gosnell

and Kreibel (2000), Chordia (2001) and Hegde and McDermott (2003) find evidence of a

permanent increase in liquidity of stocks added to the index. The increase in trading volume

results from transaction carried out by managers of mutual funds tracking the index. The

increased liquidity lowers the risk premium resulting in higher share prices. If the liquidity

hypothesis holds, we would expect a positive and statistically significant increase in price

following the announcement of an addition to the index, and negative returns following the

announcement of a deletion.

Certification / Information Hypothesis: Embedded in the downward sloping demand

curve and the price-pressure hypothesis is the assumption that inclusion of a share into an

index is an ‘information-free’ event. This draws upon S&P’s assertion that addition (or

deletion) does not reflect an opinion on the firm’s earnings prospects. However, Jain (1987)

contends that changes in the index do convey new information about the firm’s prospects. He

asserts that inclusion of a stock reflects an implicit belief on the part of S&P about the firm’s

stability, and thus, earnings prospects. Dhillon & Johnson (1991) find support for this

proposition by demonstrating that inclusion of a share also affects the prices of derivatives on

the firm’s shares and other contingent securities. Denis, McConnell, Ovtchinnikov and Yu

(2003) provide new evidence in support of the information hypothesis, showing that inclusion

in the S&P 500 index leads to upward revisions in earnings estimates. Chen, Noronha and

Singal (2004) suggest that S&P 500 index effect may result from heightened investor

awareness of the firm, bringing increased market scrutiny and reducing unsystematic risk.

In studies of non-US markets, Kaul, Mehrotra and Morck (2000) examine the effects

of changes in the weights of stocks included in the Toronto Stock Exchange index from

market-cap based to free-float based weights and find evidence of significant price increases

during the event week; however, no price reversal occurred as trading volume returned to

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normal levels after the event. Bildik and Gulay (2001) test changes in index composition for

the Istanbul stock exchange and find stocks included in (deleted from) the ISE-100 and ISE-

30 generate positive (negative) returns. They speculate that the absence of index funds

tracking the indexes appears to result in the effects being much smaller than in other markets;

they also find significant increase in trading volumes for both events. Liu (2000) examines

Nikkei 500 index changes and finds significant price increases (decreases) for additions

(deletions) with no post-event reversal, consistent with the downward sloping demand curve

hypothesis. In contrast to these findings of permanent price effects, Chan and Howard (2002)

report that positive returns precede inclusion in the open-ended Australian All Ordinaries

index, but are fully reversed within weeks after inclusion.

Table 7: Number of Listed Companies and Changes in Growth

No. of Listed Companies on Exchange % Changes in No. of Listed Companies

NYSE London Tokyo Hong Kong Singapore NYSE London Tokyo

Hong Kong Singapore

1990 1,774 2,559 1,752 299 172 1991 1,989 2,572 1,764 357 182 12.12 0.51 0.68 19.40 5.81 1992 1,750 2,440 1,768 413 195 -12.02 -5.13 0.23 15.69 7.14 1993 1,945 2,412 1,775 477 216 11.14 -1.15 0.40 15.50 10.77 1994 2,128 2,416 1,782 529 251 9.41 0.17 0.39 10.90 16.20 1995 2,242 2,502 1,791 542 272 5.36 3.56 0.51 2.46 8.37 1996 2,476 2,623 1,833 583 296 10.44 4.84 2.35 7.56 8.82 1997 2,626 2,513 1,865 658 334 6.06 -4.19 1.75 12.86 12.84 1998 2,670 2,423 1,890 680 358 1.68 -3.58 1.34 3.34 7.19 1999 3,025 2,274 1,935 708 408 13.30 -6.15 2.38 4.12 13.97 2000 2,468 2,374 2,096 790 480 -18.41 4.40 8.32 11.58 17.65 2001 2,400 2,332 2,141 867 492 -2.76 -1.77 2.15 9.75 2.50 2002 2,366 2,272 2,153 978 501 -1.42 -2.57 0.56 12.80 1.83

Source: World Federation of Exchanges, www.world-exchanges.org

Data

Our sample consists of all the changes in the HSI from 1990 to 2004 and the STI from

1998 to 2004. There are 33 additions to and 33 deletions from the HSI; with the STI, we have

35 additions and 35 deletions. A list of these stocks is attached to the appendix. For each of

Comment [PS1]:

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these stocks, we obtain the daily price and volume data from DataStream; we drop a stock if

this data is not available for at least 280 days before announcement and 280 days after the

effective day. After this screen, we are left with daily returns and trading volumes for 30

additions to and 21 deletions from the HSI; for the STI, we have 34 additions and 35

deletions. We also collect data on the daily index levels and total market volume from

DataStream.

Firms are deleted from an index on account of bankruptcy, a merger, or following

acquisition. In such cases firms cease to exist on the register of ‘live’ companies. To obtain

price and trading volume information on these firms, we turn to the ‘dead firms’ register in

Datastream. Information on the announcement and effective dates for the changes in the two

indices is obtained from Singapore Press Holdings and Hang Seng Company.

Methodology

Price effects: We assess the price effects of HSI and STI changes by examining the

abnormal returns around the announcement day. We use two different measures of abnormal

returns. First, we calculate the abnormal return as the difference between the stock return and

the return on the relevant index; this measure is the market-adjusted return measure used by

Lynch and Mendenhall (1997) and Chen, Noronha and Singal (2004), among others. Next,

we compute the abnormal return as the market model residual, with the Brown & Warner,

1985 methodology. The market model parameters are estimated over a 240-day pre-

announcement window (ranging from -280 days to -41 days relative to the announcement day)

with the index returns as the proxy for the market portfolio1.

1 Edmister, Graham and Pirie (1994) point out that using a pre-event window to estimate the model parameters could result in a run-up (or run-down) bias. To rule out this bias, we also compute excess returns using an identical post-event estimation period ranging from +41 to +280 days following the effective date. After examining the results, our conclusions remain unchanged.

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Volume Effects: To study the effects of index changes on trading volumes, we

compute an excess volume measure, similar to Harris & Gurel (1986), as follows:

Abnormal volume = ( Vi,t / Vi ) / ( Vm,t / Vm )

where V i,t is the volume on day ‘t’ for stock ‘i’ , V i is the average volume turnover for stock

‘i’ in a 60-day base period starting 90 days and ending 30 days before the index change

announcement, Vm,t is the market volume on day ‘t’ and Vm is the average market volume in

the base period. Market volume is defined as the volume of all stocks that are traded on the

exchange.

Results

We report the price effects for HSI index changes in Table 1 and for the STI index

changes in Table 2. In the Hong Kong market, we find significant positive returns on the

announcement day for the 30 additions to the HSI, using both the market-adjusted return and

market-model excess return measures. For ten of these additions, there is a gap of a few days

between the announcement and the effective day during which the additions continue to show

positive returns. However, there is a significant reversal on the effective day when the returns

turn negative. Continuing along, we find that the cumulative return for the period that starts

with the announcement and ends 10 days after the effective day is not statistically significant;

this suggests that the announcement day positive returns are fully reversed within ten days

after the effective day.

With HSI deletions, we find that the announcement day reaction to the 21 HSI

deletions is significantly negative, as expected. However, the negative returns appear to have

been reversed in the post announcement period. We find that the cumulative return over the

announcement to 10 days after the effective day period is not statistically distinguishable

from zero. Thus, with HSI additions and deletions, we find strong support for full reversal of

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the price effects. These results are consistent with price-pressure hypothesis reported in other

markets.

In the Singapore market, we find no significant price effects following additions to the

STI, as shown in Table 2. This finding is significant, given that the STI did not have an index

fund following for most of the period under study; this would appear to suggest that the price

effects reported for HSI additions (and index additions in other studies) may be driven more

by the excess demand for the newly added stocks than the information signalled by inclusion

in the index. We do find positive returns in the post-announcement period for the 22 additions

where the effective day is different from the announcement day. However, the returns turn

negative on the effective day and the market-adjusted returns measure shows that the

cumulative returns from announcement to 10 days after the effective day is not statistically

significant; this suggests that the positive returns in the immediate aftermath of the

announcement are fully reversed subsequently. The market-model excess return measure,

which is significantly negative for this period, also supports the price reversal hypothesis,

though it suggests that the reversal happens sooner than 10 days after the effective day.

Examining the 35 deletions from the STI, we find that the price effects are negative

all the way from announcement to 10 days after the effective day. For example, the

cumulative returns from the announcement to 10 days after listing are a substantial -8.67% (it

is -11% using the market-model excess return measure). This is the only subset in our sample

where we observe permanent price effects following an index change.

We next examine the effects of index changes on the trading volume of the affected

stocks. The median abnormal volume (measured relative to the base period volume and

adjusted for market volume changes) for the additions and deletions over different

observation periods is in Table 3. We also report the proportion of the sample for which the

observed volume exceeds the base period volume. For HSI additions and deletions, we find a

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spike in volume on the announcement day and the listing day, but trading volume before

announcement and after the effective day is at normal levels. This result, together with the

price effects, suggests that the reaction to HSI changes is consistent with the price pressure

hypothesis. In the case of STI changes, we are puzzled by a significant drop in the volume for

both index additions and deletions. The pre-announcement and post-effective day volumes

for STI additions are at normal levels; for STI deletions, we find that trading volumes are

slightly higher than normal after the effective day.

Conclusions

We examine the price and volume effects on stocks involved in changes in the Hang

Seng Index of Hong Kong and the Straits Times Index of Singapore. The total investment in

funds that track the HSI (over HK$ 37 billion) is substantially greater than the investment in

funds that track the STI (nearly S$ 0.5 billion). Stocks added to the HSI show significantly

positive returns at announcement but these returns are subsequently reversed within 10 days

after the effective day. Stocks deleted from the HSI experience the opposite effect; there is a

significant decline in prices on the announcement day, but within ten days of the effective

day, the cumulative returns are not statistically significant. These effects are confirmed by the

trends in the abnormal trading volume which shows a spike around the announcement and

effective days, but reverts to normal in the post-effective day period.

For STI additions we do not find any significant reaction on the announcement day; in

the subsequent periods also, the returns are not substantial. We find it interesting that addition

to the STI index, which does not have a large index fund following, does not lead to large

price reactions. It leads us to the conclusion that the price effects noted with other index

additions may result largely from the demand-supply disequilibrium caused by index mutual

funds and ETF’s rather than any new information or certification signalled by index inclusion.

Alternatively, it is also possible that in markets like Singapore and Hong Kong where the

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number of securities traded is relatively small, the information or certification signalled by

index inclusion is not significant, since market participants are aware of the prospects for

these firms even before index inclusion.

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References Beneish, Messod D., and Robert E. Whaley, 1996. An Anatomy of the "S&P 500 Game": The Effects of

Changing the Rules. Journal of Finance 51: 1909-30.

Bildik Recep and Guzhan Gulay, 2001. Effects of Changes in Index Composition on Stock Market: Evidence from Istanbul Stock Exchange, SSRN Workig paper – id273749

Biktimirov, Ernest N., Arnold R. Cowan, and Bradford D. Jordan, 2004. Do Demand Curves for Small Stocks Slope Down? Journal of Financial Research 27: 161-78.

Brown, Stephen J., and Jerold B. Warner, 1985. Using Daily Stock Returns: The Case of Event Studies. Journal of Financial Economics 14: 3-31.

Chan, Howard., and Peter F. Howard, 2002. Additions to and deletions from an open-ended market index: Evidence from the Australian All-Ordinaries. Australian Journal of Management 27: 45-74.

Chen, Honghui, Gregory Noronha, and Vijay Singal, 2004. The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation. Journal of Finance 59: 1901-30.

Chordia, Tarun, 2001. Liquidity and Returns: The Impact of Inclusion into the S&P 500 index, Working paper, Emory University

Denis, Diane K., John J. McConnell, Alexei V. Ovtchinnikov, and Yun Yu, 2003. S&P 500 Index additions and earnings expectations . Journal of Finance 58: 1821-40.

Dhillon, Upinder, and Herb Johnson, 1991. Changes in the Standard and Poor's 500 List. Journal of Business 64: 75-85.

Edmister, Robert O., Steven A. Graham, and Wendy L. Pirie, 1994. Excess returns of index replacement stocks: Evidence of liquidity and substitutability. Journal of Financial Research 17: 333-46.

Harris, Lawrence, and Eitan Gurel, 1986. Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures. Journal of Finance 41: 815-29.

Hegde, Shantaram P., and John B. McDermott, 2003. The liquidity effects of revisions to the S&P 500 index: an empirical analysis. Journal of Financial Markets 6: 413-59.

Gosnell, Thomas and Timothy Kreibel, 2000. Market Liquidity and Changes in the Roster of the Standard and Poor’s 500 Index, Oklahoma State University Working Paper

Jain, Prem C., 1987. The Effect on Stock Price of Inclusion in or Exclusion from the S&P 500. Financial Analysts Journal 43: 58-65.

Kaul, Aditya, Vikas Mehrotra, and Randall Morck, 2000. Demand curves for stocks do slope down: New evidence from an index weights adjustment. Journal of Finance 55: 893-912.

Lynch, Anthony W., and Richard R. Mendenhall, 1997. New Evidence on Stock Price Effects associated with changes in the S&P 500. Journal of Business 70: 351-58.

Liu, Shinhua, 2000. Changes in the Nikkei 500: New Evidence for downward sloping demand curves for stocks. International Review of Finance 1: 245-267.

Shleifer, Andrei., 1986. Do Demand Curves for Stocks Slope Down? Journal of Finance 41: 579-90.

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TABLE 1

Price effects for stocks added to and deleted from the Hang Seng index

The market-adjusted cumulative returns and the market model cumulative abnormal returns for all stocks added to the Hang Seng Index between 1990 and 2004 are in the first panel, followed by similar data for all stocks deleted from the Index. The market adjusted return is the excess of the daily stock return over the index return. Market model abnormal returns are based on model parameters estimated over a 240 day pre-event window (days -280 to -41 relative to the announcement day) with the index as the proxy for the market.

Market-adjusted return Market model excess return

Period N Mean Median t-stat Mean Median t-stat

Hang Seng Index Additions Pre-announcement period (AD-10, AD-1) 30 1.25% -0.20% 0.92 -0.70% -1.25% - 0.50

Announcement Day (AD) 30 1.65% 0.87% 2.42** 1.43% 0.68% 2.18**

Post-announcement period (AD+1,ED-1) 10 5.02% 5.77% 2.01 3.63% 3.28% 1.51

Effective Day (ED) 10 -2.21% -2.52% - 3.06** -1.95% -2.07% - 3.24***

Post-Effective period (ED+1,ED+10) 30 0.02% 0.65% 0.01 -2.18% -2.30% - 1.40

Announcement to Post-Effective period (AD, ED+10) 30 2.60% -0.44% 1.37 -0.19% -3.37% - 0.09

Hang Seng Index Deletions

Pre-announcement period (AD-10, AD-1) 21 -2.25% -1.25% - 1.49 -2.50% -0.44% - 1.66

Announcement Day (AD) 21 -3.26% -2.82% - 2.77*** -3.33% -2.93% - 2.81***

Post-announcement period (AD+1,ED-1) 9 -1.28% -1.44% - 0.81 -0.29% -0.44% - 0.17

Effective Day (ED) 9 2.08% 1.72% 1.70 2.21% 1.69% 1.74

Post-Effective period (ED+1,ED+10) 21 1.02% -0.22% 0.64 1.05% 0.29% 0.64

Announcement to Post-Effective period (AD, ED+10) 21 -1.90% -1.69% - 0.09 -1.46% -1.00% - 0.69

*** Significant at the 1% level ** Significant at the 5% level

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TABLE 2

Price effects for stocks added to and deleted from the Singapore Times index

The market-adjusted cumulative returns and the market model cumulative abnormal returns for all stocks added to the Singapore Times Index between 1998 and 2004 are in the first panel, followed by similar data for all stocks deleted from the Index. The market adjusted return is the excess of the daily stock return over the index return. Market model abnormal returns are based on model parameters estimated over a 240 day pre-event window (days -280 to -41 relative to the announcement day) with the index as the proxy for the market.

Market-adjusted return Market model excess return Period N

Mean Median t-stat Mean Median t-stat

Singapore Times Index Additions Pre-announcement period (AD-10, AD-1) 34 2.60% 2.21% 1.68 0.21% 0.45% 0.17

Announcement Day (AD) 34 0.56% 0.47% 1.43 0.09% -0.17% 0.23

Post-announcement period (AD+1,ED-1) 22 1.58% 1.18% 2.79*** 1.12% 1.18% 2.25**

Effective Day (ED) 22 -1.06% -1.03% - 1.61 -2.02% -1.52% - 3.44***

Post-Effective period (ED+1,ED+10) 34 -0.15% -0.42% - 0.08 -3.54% -4.44% - 1.86

Announcement to Post-Effective period (AD, ED+10)

34 0.74% 1.40% 0.38 -4.03% -4.77% - 2.15**

Singapore Times Index Deletions

Pre-announcement period (AD-10, AD-1) 35 -0.76% -1.13% - 0.60 -0.61% -0.31% - 0.59

Announcement Day (AD) 35 -0.50% -0.41% - 1.60 -0.77% -0.63% - 2.54**

Post-announcement period (AD+1,ED-1) 27 -2.48% -2.91% - 3.33*** -2.78% -3.17% - 4.18***

Effective Day (ED) 27 -0.53% -0.05% - 0.88 -1.09% -1.07% - 2.39**

Post-Effective period (ED+1,ED+10) 35 -5.86% -5.15% - 3.32*** -7.27% -7.42% - 4.62***

Announcement to Post-Effective period (AD, ED+10)

35 -8.67% -6.34% - 3.97*** -11.03% -7.65% - 5.96***

*** Significant at the 1% level ** Significant at the 5% level

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TABLE 3

Volume effects of changes in the Hang Seng Index and the Singapore Times Index The abnormal trading volume in the period of interest is measured relative to the average daily volume in the base period (days -90 to day -31 relative to announcement period) and is adjusted for the relative change in the market volume. The median of the abnormal volumes and the proportion of stocks for which the volume exceeds the base period volume are reported below. The significance of the proportions was tested using the binomial distribution.

Period N Median Prop>base period vol N Median Prop>base

period vol

Hang Seng Index additions Singapore Times Index Additions Pre-announcement period (AD-10, AD-1) 30 -2% 43% 34 -7% 41%

Announcement Day (AD) 28 30% 64% 34 -32% 32%**

Effective Day (ED) 10 121% 100%*** 22 18% 64%

Post-Effective period (ED+1,ED+10) 30 0% 50% 34 4% 53%

Hang Seng Index deletions Singapore Times Index Deletions Pre-announcement period (AD-10, AD-1) 21 10% 57% 35 14% 57%

Announcement Day (AD) 21 65% 71%* 34 -48% 26%***

Effective Day (ED) 9 380% 78% 26 9% 58%

Post-Effective period (ED+1,ED+10) 21 7% 52% 35 26% 66%*

*** Significant at the 1% level ** Significant at the 5% level * Significant at 10%

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Table 4: Changes in the Hang Seng Index

Additions Deletions Effective date Additions Deletions

Effective date

World Int'l 12-Dec-80 18 Oriental Press 30-Nov-94

East Asia Nav 12-Dec-80 15 Jar Matheson 30-Nov-94 Bank of East Asia 16-Jan-84 101 Amoy Prop 30-Nov-94 Henderson Land 16-Jan-84 98 Winsor Ind 30-Nov-94

Int'l City 16-Jan-84 179 Johnson Elec 30-Nov-94

Swire Prop 16-Jan-84 191 Lai Sun Int'l 30-Nov-94

Cross Har Tunnel 16-Jan-84 270 Guangdong Inv 30-Nov-94

HK Aircraft 16-Jan-84 208 Jar Strategic 30-Nov-94 Harbour Centre 16-Jan-84 69 Shangri-La Asia 28-Feb-95 W Maritime 'A' 16-Jan-84 7 HK Land Hldgs 28-Feb-95 Hysan Dev 05-Jul-84 83 Sino Land 28-Feb-95 Swire Prop 05-Jul-84 353 Dairy Farm Int'l 28-Feb-95

HK-TVB 03-Jun-85 583 SCMP (Hldgs) 28-Feb-95

W Marden 'A' 03-Jun-85 422 Mandarin Oriental 28-Feb-95

Hang Lung Dev 02-Dec-85 97 Henderson Inv 30-Aug-96

Int'l City 02-Dec-85 44 HK Aircraft 30-Aug-96 East Asia Nav 24-Mar-86 142 First Pacific 30-Aug-96 Orient Overseas 24-Mar-86 71 Miramar 30-Aug-96 HK Aircraft 24-Mar-86 291 China Resources 31-Jul-97

Wah Kwong Ship 24-Mar-86 18 Oriental Press 31-Jul-97

Cathay Pac Air 02-Jun-86 1038 CKI Hldgs 31-Jul-97 East Asia Nav 02-Jun-86 179 Johnson Elec 31-Jul-97 Wharf (Hldgs) 06-Oct-86 2 CLP Hldgs 06-Jan-98 HK Wharf 06-Oct-86 2 China Light 06-Jan-98 Dairy Farm Int'l 05-Jan-87 363 Shanghai Ind Hldgs 27-Jan-98 Wing On Co 05-Jan-87 242 Shun Tak Hldgs 27-Jan-98 Jar Strategic 10-Feb-87 941 China Telecom 27-Jan-98 Jar Securities 10-Feb-87 583 SCMP (Hldgs) 27-Jan-98 G I Cement Hldgs 27-May-87 179 Johnson Elec H 06-Dec-99 G I Cement 27-May-87 45 HK & S Hotels 06-Dec-99 Cavendish Int'l 01-Sep-87 223 Dao Heng Bank 06-Dec-99 HK Yaumati 01-Sep-87 54 Hopewell Hldgs 06-Dec-99 Mandarin Oriental 01-Sep-87 315 SmarTone Telecom 06-Dec-99 Stelux Hldgs 01-Sep-87 270 Guangdong Inv 06-Dec-99 HK Telecom HK Telephone 02-Feb-88 494 Li & Fung 02-Aug-00 41 Great Eagle Hldgs 02-Aug-00

TVB HK-TVB 24-Nov-88 992 Legend Hldgs 02-Aug-00

69 Shangri-La Asia 02-Aug-00 Great Eagle 31-Jan-89 1186 PCCW 09-Aug-00

G I Cement Hldgs 31-Jan-89

8 CWHKT (HK telecom) 09-Aug-00

Hopewell Hldgs 31-Jan-89 8 PCCW 17-Aug-00 HK Realty 'A' 31-Jan-89 1186 PCCW 17-Aug-00 Lai Sun Int'l 31-Jan-89 66 MTR Corporation 01-Jun-01 Tai Cheung 31-Jan-89 142 First Pacific 01-Jun-01 HK Land Hldgs 16-May-89 762 China Unicom 01-Jun-01 HK Land 16-May-89 315 SmarTone 01-Jun-01

18

Telecom

41 Great Eagle Hldgs 12-Apr-90 883 CNOOC 31-Jul-01 41 Great Eagle 12-Apr-90 223 Dao Heng Bank 31-Jul-01 5 HSBC Hldgs plc 03-Apr-91 330 Esprit Hldgs 02-Dec-02 5 HK Bank 03-Apr-91 10 Hang Lung Group 02-Dec-02 267 CITIC Pacific 04-Aug-92 2388 BOC Hong Kong 02-Dec-02

123 Cavendish Int'l 04-Aug-92 14 Hysan Dev 02-Dec-02

242 Shun Tak Hldgs 30-Jun-93 551 Yue Yuen Ind 09-Jun-03

62 Kln Motor Bus 30-Jun-93 17 New World Dev 09-Jun-03

20 Wheelock 24-Nov-93 1199 COSCO Pacific 09-Jun-03 20 World Int'l 24-Nov-93 83 Sino Land 09-Jun-03

19

Table 5: Changes in the Straits Times Index

Event number Name

Index change Action

Announcement date

Index Change Effective date

1 Sembcorp Industrial Included 05-Aug-98 06-Aug-98 2 Hong Leong Asia Included 05-Aug-98 06-Aug-98 3 Dairy Farm Included 28-Aug-99 30-Aug-99 4 Serial System Included 28-Aug-99 30-Aug-99 5 Econ International Included 28-Aug-99 30-Aug-99 6 Hotung Investment Included 28-Aug-99 30-Aug-99 7 Amara Holdings Included 28-Aug-99 30-Aug-99 8 GES International Included 28-Aug-99 30-Aug-99 9 Brilliant Manufacturing Included 28-Aug-99 30-Aug-99 10 Datapulse Included 28-Aug-99 30-Aug-99 11 Datacraft Included 28-Aug-99 30-Aug-99 12 Ingram Micro Dropped 28-Aug-99 30-Aug-99 13 FHTK Holdings Dropped 28-Aug-99 30-Aug-99 14 Robinsons Dropped 28-Aug-99 30-Aug-99 15 L&M Dropped 28-Aug-99 30-Aug-99 16 Hong Leong Finance Dropped 28-Aug-99 30-Aug-99 17 OUE Dropped 28-Aug-99 30-Aug-99 18 SPC Dropped 28-Aug-99 30-Aug-99 19 Freight Links Dropped 28-Aug-99 30-Aug-99 20 Chartered Semiconductor Included 09-Jun-00 19-Jun-00 21 Thakral Dropped 09-Jun-00 19-Jun-00 22 Capitaland Included 18-Nov-00 21-Nov-00 23 Delgro Included 06-Sep-01 12-Sep-01 24 Great Eastern Included 06-Sep-01 12-Sep-01 25 Jardine Strategic Included 06-Sep-01 12-Sep-01 26 Keppel Land Included 06-Sep-01 12-Sep-01 27 Natsteel Included 06-Sep-01 12-Sep-01 28 OUE Included 06-Sep-01 12-Sep-01 29 Sembcorp Logistics Included 06-Sep-01 12-Sep-01 30 Sembcorp Marine Included 06-Sep-01 12-Sep-01 31 Singapore Exchange Included 06-Sep-01 12-Sep-01 32 Singapore Land Included 06-Sep-01 12-Sep-01 33 SMRT Included 06-Sep-01 12-Sep-01 34 ST Assembly Included 06-Sep-01 12-Sep-01 35 Total Access Included 06-Sep-01 12-Sep-01 36 United Overseas Land Included 06-Sep-01 12-Sep-01

37 Advanced Systems

Automation Dropped 06-Sep-01 12-Sep-01 38 Amara Holdings Dropped 06-Sep-01 12-Sep-01 39 Brilliant Manufacturing Dropped 06-Sep-01 12-Sep-01 40 Cerebos Dropped 06-Sep-01 12-Sep-01 41 Comfort Group Dropped 06-Sep-01 12-Sep-01 42 Datapulse Dropped 06-Sep-01 12-Sep-01 43 Econ International Dropped 06-Sep-01 12-Sep-01 44 First Capital Dropped 06-Sep-01 12-Sep-01 45 GP Batteries Dropped 06-Sep-01 12-Sep-01 46 Gul Tech Dropped 06-Sep-01 12-Sep-01 47 Guthries GTS Dropped 06-Sep-01 12-Sep-01 48 Hong Leong Asia Dropped 06-Sep-01 12-Sep-01

20

49 Hwa Hong Dropped 06-Sep-01 12-Sep-01 50 Informatics Dropped 06-Sep-01 12-Sep-01 51 Kim Eng Dropped 06-Sep-01 12-Sep-01 52 Lindeteves-Jacoberg Dropped 06-Sep-01 12-Sep-01 53 Metro Dropped 06-Sep-01 12-Sep-01 54 MMI Dropped 06-Sep-01 12-Sep-01 55 Serial System Dropped 06-Sep-01 12-Sep-01 56 Haw Par Corporation Included 10-Oct-01 11-Oct-01 57 Allgreen Properties Included 25-Mar-03 01-Apr-03 58 MobileOne Included 25-Mar-03 01-Apr-03 59 People's Food Included 25-Mar-03 01-Apr-03 60 Hotel Properties Dropped 25-Mar-03 01-Apr-03 61 Marco Polo Development Dropped 25-Mar-03 01-Apr-03 62 UIC Dropped 25-Mar-03 01-Apr-03 63 Singapore Post Included 25-Feb-04 01-Mar-04 64 Cosco Investment Included 25-Feb-04 01-Mar-04 65 BIL International Included 25-Feb-04 01-Mar-04 66 TPV Technology Included 25-Feb-04 01-Mar-04 67 Hotung Investment Dropped 25-Feb-04 01-Mar-04 68 Natsteel Dropped 25-Feb-04 01-Mar-04 69 OUE Dropped 25-Feb-04 01-Mar-04 70 SMRT Dropped 25-Feb-04 01-Mar-04