Investing in India provides benefits to US firms as evidenced by positive stock price reactions. An event study of US firm investments in India from 2000 found that 14 of 36 firms experienced significant positive stock price changes around the investment announcement dates. Further regression found that abnormal returns were higher for larger firms and those with greater research and development investments. Future research could expand the sample size and distinguish between first investments and sequential ones.

1. INVESTING IN ANINVESTING IN AN
EMERGING MARKET:EMERGING MARKET:
EVIDENCE FROM US FIRMSEVIDENCE FROM US FIRMS
INVESTING IN INDIAINVESTING IN INDIA
Shavin MalhotraShavin Malhotra
& Nisha Malhotra& Nisha Malhotra

2. ObjectiveObjective
• Does news of foreign directDoes news of foreign direct
investment in India have any impactinvestment in India have any impact
on shareholder’s wealth (in term ofon shareholder’s wealth (in term of
stock prices)?stock prices)?
• Does the investing firm’s stock priceDoes the investing firm’s stock price
reaction, to the news of investment,reaction, to the news of investment,
varies by firm level characteristics?varies by firm level characteristics?

3. Some of the Earlier ResearchSome of the Earlier Research
 Mock and Yeung (1992)Mock and Yeung (1992)
Use event study to test for internalization theory.Use event study to test for internalization theory.
They look for relation between stock priceThey look for relation between stock price
reaction and indicators of presence of acquirerreaction and indicators of presence of acquirer
intangible assets (technology, R&D..)intangible assets (technology, R&D..)
 Lang and Ofek (1995)Lang and Ofek (1995)
US investment in Eastern EuropeUS investment in Eastern Europe
 Chen et al. (2001)Chen et al. (2001)
Taiwanese investment in China mainlandTaiwanese investment in China mainland
 Chen et all (2000)Chen et all (2000)
Foreign investment by Singapore firmsForeign investment by Singapore firms

4. Event StudyEvent Study
An event study is used to examine theAn event study is used to examine the
reaction of investors to positive orreaction of investors to positive or
negative news (also called events).negative news (also called events).
A simple event study involves the followingA simple event study involves the following
steps:steps:
• Event of interest (event window)Event of interest (event window)
• Selection of firmsSelection of firms
• Predicting "normal" return during the event window inPredicting "normal" return during the event window in
the absence of the eventthe absence of the event
• Abnormal Return=Actual Return-Predicted ReturnAbnormal Return=Actual Return-Predicted Return
• Estimating Cumulative Abnormal Return for the eventEstimating Cumulative Abnormal Return for the event
window.window.
• Testing whether the Cumulative Abnormal return isTesting whether the Cumulative Abnormal return is
statistically different from zero.statistically different from zero.

5. Event StudyEvent Study
Selection of FirmsSelection of Firms
US Firms Investing in INDIAUS Firms Investing in INDIA
 'Lexis Nexis Academic' database for the financial'Lexis Nexis Academic' database for the financial
year 2000year 2000
• Lexis Nexis Academic Database and the Business andLexis Nexis Academic Database and the Business and
Company Resource Center of Gale Group Database.Company Resource Center of Gale Group Database.
 Centre for Research on Security Prices (CRSP)Centre for Research on Security Prices (CRSP)
databasedatabase
(AMEX, NYSE, NASDAQ)(AMEX, NYSE, NASDAQ)

6. Event StudyEvent Study
Standard market model to predict Normal ReturnsStandard market model to predict Normal Returns
itR is firm i's return at date t
it
NT
tn
inntitmtiiit eAEWeRR ∑
+
+=
++++=
1
βα
is firm i's return at date t;
is the return of the value weighted NYSE/AMEX/NASDAQ index
at date t;
is a serially uncorrelated error term with mean 0 and constant
variance for stock i.
is a dummy variable that takes the value 1 for the n day of the
event window and 0 otherwise,
, and are additional parameters to be estimated.
The above equation is estimated using ordinary least squares.

7. Event StudyEvent Study

t=0
Estimation Period
(365 days)
Event Window
(-5, 5)
t= -396 t= -31

8. Event StudyEvent Study
Standard market model to predict Abnormal ReturnsStandard market model to predict Abnormal Returns
 The coefficient of the dummy variable (EW)
is the abnormal return
 At the Firm level, we find 14 firms out of 36
firms in our sample experience a significant
change in their stock prices
)ˆˆ(ˆ
mtiiitit RRA βα +−=

9. Table 1: AR at the firm levelTable 1: AR at the firm level
Announcement US firms investing in India Event Window (0,0) Z statistics
4/4/2000 SUN MICROSYSTEMS 5.46% 1.69*
6/15/2000 SUN MICROSYSTEMS 1.88% 0.57
9/14/2000 MICROSOFT CORP -4.06% -1.61$
12/13/2000 HONEYWELL INTERNA 0.44% 0.14
8/31/2000 DELL COMPUTER COR 7.84% 2.42**
11/23/2000 GENERAL ELECTRIC 0.22% 0.12
6/16/2000 GENERAL MOTORS CO -3.35% -1.52$
12/28/2000 GENERAL MOTORS CO -3.11% -1.33$
3/21/2000 ENRON CORP INC S 4.80% 1.70*
3/29/2000 WHIRLPOOL CORP R 6.09% 2.43**
2/22/2000 COMPUTER ASSOCIAT -2.31% -0.72
5/12/2000 COMPUTER ASSOCIAT -4.45% -1.45$
8/17/2000 COMPUTER ASSOCIAT 2.52% 0.64
11/27/2000 SHELL TRANSPORT & 1.12% 0.56
12/19/2000 HEWLETT PACKARD C 3.21% 1.02
4/18/2000 MCDONALDS CORP ES -5.52% -2.47**

10. 3/29/2000 CHASE MANHATTAN C -1.77% -0.68
3/16/2000 INTEL CORP N RES 1.84% 0.66
6/13/2000 INTEL CORP N RES 4.73% 1.60$
5/18/2000 COMPAQ COMPUTER C -1.45% -0.43
8/11/2000 COMPAQ COMPUTER C -0.51% -0.15
3/14/2000 NEWS CORP LTD O L -0.90% -0.4
4/13/2000 SIMPSON INDUSTRIE 1.34% 0.52
6/13/2000 CISCO SYSTEMS INC 4.04% 1.52$
10/19/2000 CISCO SYSTEMS INC 6.89% 2.47**
9/26/2000 SITEL CORP ING CO -34.09% -5.81***
12/20/2000 SITEL CORP ING CO 3.70% 0.59
6/13/2000 LUCENT TECHNOLOGI 0.15% 0.05
9/25/2000 LUCENT TECHNOLOGI -2.67% -0.84
4/19/2000 LORAL SPACE & COM -3.50% -1.01
4/19/2000 BROADVISION INC O -9.18% -1.44$
5/8/2000 CRITICAL PATH INC 1.09% 0.15
9/26/2000 JUPITER MEDIA MET -7.23% -1.16
4/3/2000 T D WATERHOUSE GR 2.91% 0.7
11/1/2000 UNITED PARCEL S B -1.74% -0.74
10/3/2000 SOFTWARE TECHNOLO -4.29% -0.53

11. SECONDARY REGRESSIONSECONDARY REGRESSION
Ordinary Least SquareOrdinary Least Square
 Regressing Abnormal Returns onRegressing Abnormal Returns on
• ConstantConstant
• Log of Total AssetsLog of Total Assets
• Research and DevelopmentResearch and Development
• Cash FlowCash Flow
• Industries DummiesIndustries Dummies
 SIC:737 SIC:357 SIC:621SIC:737 SIC:357 SIC:621

12. SECONDARY REGRESSIONSECONDARY REGRESSIONAbnormal Returns Abnormal Return
Log of Total Assets 0.00006
(2.57)**
Research and Development 0.00022
(1.80)*
Cash Flow -0.0002
-1.65
SIC:737 0.00002
-0.2
SIC:357 0.00014
-1.19
SIC:621 0.00078
(2.21)**
Constant -0.00059

13. Conclusion andConclusion and Future ResearchFuture Research
 Investing in India is a noteworthy event forInvesting in India is a noteworthy event for
the US firms.the US firms.
 The benefits are positive and higher forThe benefits are positive and higher for
bigger firms, and firms with higher level ofbigger firms, and firms with higher level of
R&D investment.R&D investment.
Expand the sample size to include moreExpand the sample size to include more
cases with higher level of investmentcases with higher level of investment
distinguish between first time investmentdistinguish between first time investment
and sequential investments.and sequential investments.
Account for Multinationals already presentAccount for Multinationals already present
in target country show insignificant results.in target country show insignificant results.