The Effect of the 2019 Indonesia Presidential Election on Abnormal Return of LQ45 Index

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The Effect of the 2019 Indonesia Presidential Election on Abnormal Return of LQ45 Index

Mirza Hedismarlina Yuneline^1*, Agam Pramana Sofyan¹

1 Management Study Program, EKUITAS School of Business, Bandung, Indonesia

*Corresponding Author: mirza.yuneline@ekuitas.ac.id

Accepted: 15 December 2020 | Published: 31 December 2020

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Abstract: The 2019 Indonesia Presidential Election with all the political dynamics received special attention for investors in the capital market in maximizing their portfolio and minimizing the risks that would occur. This study aimed to examine the effect of the 2019 Indonesia Presidential Election on the abnormal return by 3 window events related to the Presidential Election to examine the difference of abnormal return earned by the investor at the moment 5 days before and after the event window using an event studies method. The results show that abnormal returns that occur in each window of events that indicate the information absorbed by the market. But during the 2019 Presidential Election and the inauguration of President and Vice President of Indonesia event, there is no significant difference. A significant difference in abnormal returns occurred during the official announcement of the recapitulation of the election of the President and Vice President of Indonesia in 2019.

Keywords: 2019 Indonesian Presidential Election, Abnormal Return, LQ45 Index

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1. Introduction

Referring to World Bank (2017), the political stability, macroeconomic condition, and security are one of the important drivers of foreign direct investment (FDI) in developing countries. The World Bank’s survey resulted that 50% of multinational investors considered political stability and security conditions are very important for the investment climate.

Based on data from the Indonesia Stock Exchange (IDX) and the Indonesian Central Securities Depository (KSEI), as of September 19^th, 2019, the share of foreign investors’ ownership amounted to 50.46% (https://bisnis.tempo.co/read/1273178/september-2019-bei-porsi- investor-lokal-pasar-modal-49-persen/full&view=ok, retrieved at 13 October 2019).

Comparing to 2014, the share of foreign investors’ ownership fell by 21.76%. The foreign domination has advantages and disadvantages for the capital market. One of the disadvantages is that when they decide to have their funds out and affect the supply and demand principles’

in the market, it can result to the market crash. On the other hand, most of the foreign investors are institutional investors with big volume transactions and it is good for the market liquidity.

In 2019, Indonesia experienced of Presidential Election with all the political dynamics received special attention for investors in the capital market. One day after the Presidential Election, Jakarta Stock Composite Index (JSCI) was opened higher at 87.3 basis points or by 1.35% to the position of 6,568.85. This strengthening was also accompanied by the net foreign buy of Rp. 1.43 trillion (Rp. 1.2 trillion was booked one hour before trading opened). LQ45 Index is a stock market index in Indonesia Stock Exchange (IDX) consist of 45 companies with the highest market capitalization and transaction value. One day after the Presidential Election, the

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LQ45 Index was opened increase by 2.37%. Even though there is a strengthening in the value of composite index, it is feared that it will be prone to profit taking due to the influence of stronger stocks.

But it didn’t long last, after the positive sentiment, the JSCI continued to be corrected until 3 days before the official announcement of the Presidential Election’s recapitulation result. It decreased 10.46% and reached the lowest value in 2019. Even though the JSCI had rebounded several times, the sentiment continued to weaken until it finally managed to rebound again on the day before the official announcement of the KPU, with a market closing of increasing by 1.38%. Although it was corrected again at the same time due to the riots that occurred regarding the result of the vote recapitulation, the JSCI continued to show a positive trend afterwards.

With all the phenomena of political and security dynamics, the market will pay special attention to the Presidential Election events. All of these events contain information that investors will consider regarding their portfolio. The fluctuations that occur in the composite stock index also indicate that the market also responds to the information received during the Presidential Election events. Because in an efficient market, information can be obtained easily, and the stock prices usually reflect the occurred information, which indicates that the stock prices are a representation and reflection of all available information.

2. Literature Review

Several previous studies have revealed the relationship between Presidential Election events and stock prices. Trisnawati (2011) had conducted research of Indonesia Presidential Election in 2004 and 2009. The result show that there is no significant difference in the average abnormal return in the 2004 Presidential Election. In the contrary, in the 2009 Presidential Election, it was found that the average return was abnormal.

Bin (2015) argued that the volatility effects different across the different stock market in the Greater China Region. In Mainland China, stock market volatility increased significantly within the bad news. In Taiwan, stock market volatility increased whether it was bad news or good news. But Hongkong stock market volatility showed unaffected with both news. The results showed that the stock market volatility was also influenced by the stockholder’s behaviour.

Bowes (2018) stated that the market volatility increases when the result of the election is less certain. Furthermore, it supported the argument that the increase of market volatility caused by the greater uncertainty and the greater volatility happened when the publicly relevant information becomes less certain.

Eldomiaty, et.al. (2020) stated that to ensure the reliability of the political risk, the estimation of abnormal returns must be examined. By using the different methods of abnormal returns’

estimation, it was found that the political event that happened in Egypt considered had anomaly effect. Thus, the treatment of political risk must firm-customized in order to reach the exact cost of equity financing during the political disruption.

In the contrary, Alsaifi, et.al (2020) argued that the abnormal return in the banking sector had lower volatility during the Turkey’s government declared a state of emergency. The study shows that the political factors and political instability are importance in shaping the investment

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To examine the relevance of the 2019 Presidential Election to stock prices, in this study, we used an abnormal return as indicator and the event study method. The event study method is used to observe or study the events that occurred. In this case, the event study used 3 (three) window period during the 2019 Indonesian Presidential Elections, such as the day of the Presidential Election, the day of Election Announcement, and the day of the Presidential Inauguration. If the event contains information that is important to the market, the market will reactive to this information with an indicator of changes in the stock prices and will resulted the abnormal return.

3. Methodology

Market efficiency assumptions stated that the information that related to specific events are immediately reflected in stock prices. Thus, the 2019 Indonesia Presidential Election events whether it reflected to the market reaction is examined by using the event study method.

The population in this study is all emitens listed in LQ45 Index. Referring to Samsul in Trisnawati (2011), there are many factors that affect the stock price, such as the announcement of cash dividend distribution, the announcement of stock split, the announcement of right issues, the announcement of bonus or dividend shares, the announcement of warrants, the merger and acquisition plan, the changes in macroeconomic variables, the international political events, the movement of the DJIA stock index, the insider Information, the January Effect, the national political events, and the changes in the economic cycle through leading indicators. Referring on those factors, in this study, we exclude the company that perform corporate actions during the window period. The secondary data was taken from www.idx.co.id and www.finance.yahoo.com,

Referring to Elton, et.al. (2014), the following steps were needed in the event study method: 1) Collect a sample of companies that related to particular event; 2) Determines the exact day or date of the announcement and determines as day 0; 3) Specifies the research period or the event window; 4) For each sample company, we estimate the actual return as the return that has occurred or received. The actual return calculation is stated in the following formula:

𝑅_𝑖,𝑡 =𝑃_𝑡− 𝑃_𝑡−1 𝑃_𝑡−1

𝑅_𝑖,𝑡 = actual return of stock in t period 𝑃_𝑖,𝑡 = the daily stock prices in t period 𝑃_{𝑖,𝑡−1} = the daily stock prices in t-1 period

5) Estimate the abnormal return from the returns that have been obtained for each company.

An abnormal return is a return that received by investors which is not in accordance with the expectations or the difference between Expected Return and Actual Return. The abnormal return calculation is in the following formula:

𝐴𝑅_𝑖,𝑡 = 𝑅_𝑖,𝑡− 𝑅_𝑚,𝑡

𝐴𝑅_𝑖,𝑡 = abnormal return in t period 𝑅_𝑖,𝑡 = actual return of stock in t period 𝑅_𝑚,𝑡 = market return in t period

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The calculation of abnormal return using the market-adjusted return approach assumes that there is a relationship between the movements of individual stocks and market movements (Samsul, 2015: 303). With this approach, the expected return of stock is the same as the market return. The following is the calculation for market return:

𝐸(𝑅_𝑚𝑡) =𝐽𝑆𝐶𝐼_𝑡− 𝐽𝑆𝐶𝐼_𝑡−1 𝐽𝑆𝐶𝐼_𝑡−1

𝐸(𝑅_𝑚𝑡) = Expected return of stock in t period 𝐽𝑆𝐶𝐼_𝑖,𝑡 = Stock Composite Index in t period 𝐽𝑆𝐶𝐼_{𝑖,𝑡−1} = Stock Composite Index in t – 1 period

The data analysis technique used in this study was paired Sample T-Test and Wilcoxon Signed Rank Test analysis model. In the first stage, a descriptive analysis will be carried out in advance of all the research samples that have been collected previously. In the next stage, statistical testing is carried out by testing the normal distribution of available data using the Kolmogorov Smirnov test. After the normal distribution test is carried out, a partial hypothesis test will be carried out on each event window that is determined using the Paired Sample T-Test analysis test if the normal distribution test results produce normal results, and if the test results are not normally distributed, it will use the Wilcoxon Signed Rank Test analysis test model.

4. Discussion and Conclusion

This study used data of sample’s price during 5 days before and 5 days after the 3 windows period, such as:

1. On April, 17^th, 2019 as the day of the Presidential Election

2. On May, 20^th, 2019 as the recapitulation result of the Presidential Election 3. On October, 20^th, 2019 as the day of Presidential Inauguration

The samples used in this study are 42 companies are listed in the LQ45 Index which was not performed the corporate action during the window period, with the results of average abnormal return as following:

Table 1: The Average Abnormal Returns During 3 Windows Period

No. Company Event 1 Event 2 Event 3

Before After Before After Before After

1 Adaro Energy Tbk. 0.001680737 0.003822912 -0.001705041 0.008739835 -0.000411802 0.004243909 2 AKR Corporindo Tbk. -0.004384768 -0.00349423 0.000303567 0.006529276 -0.009761029 -0.014640957 3 Aneka Tambang Tbk. -0.000998661 0.000822631 -0.009815039 0.009357966 -0.019068829 0.002422155 4 Astra International Tbk. 0.00146657 -0.003144252 -0.00094545 0.00004561 0.004196553 0.001116992 5 Bank Central Asia Tbk. -0.001734743 0.002722298 -0.00312895 0.004708511 -0.001615029 -0.000633192 6 Bank Negara Indonesia

(Persero) Tbk. 0.022342823 0.00355242 0.000747879 0.000253286 0.011214973 0.007502466 7 Bank Rakyat Indonesia

(Persero) Tbk. 0.001467761 -0.001455171 -0.003854449 0.002518031 0.009685051 0.001008822 8 Bank Tabungan Negara

(Persero) Tbk. 0.018390252 -0.005332954 -0.000186388 0.004574684 -0.000168329 0.007875945 9 Bank Mandiri (Persero) Tbk. -0.000363632 0.000193081 0.001796144 0.007126248 0.003986138 0.004829068 10 Barito Pacific Tbk. 0.016935565 0.008577515 -0.003206541 -0.006963428 -0.00478956 0.016177565 11 Bumi Serpong Damai Tbk. -0.008007028 -0.004229464 -0.003776656 0.012414936 -0.003462744 0.000917934

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No. Company Event 1 Event 2 Event 3

Before After Before After Before After

13 Erajaya Swasembada Tbk. -0.018891237 0.008714714 -0.001011488 0.018245749 0.024292396 -0.017139378 14 XL Axiata Tbk. 0.017150603 0.008549444 -0.015272628 0.005492296 0.000051962 -0.010574306 15 Gudang Garam Tbk. 0.00802191 0.008393951 0.003841825 -0.004382511 -0.006010021 0.0083717 16 H.M. Sampoerna Tbk. 0.007319615 -0.007769844 0.000369376 -0.006414113 -0.008808519 -0.000531939 17 Indofood CBP Sukses Makmur

Tbk. -0.004156358 0.00281591 0.001748142 0.002075995 -0.008783807 0.000708541 18 Vale Indonesia Tbk. -0.003341414 -0.007944619 -0.01557762 0.015306334 -0.021697302 0.004821603 19 Indofood Sukses Makmur Tbk. -0.002630832 0.002852886 -0.007674261 0.003192039 -0.005389162 -0.0018641 20 Indika Energy Tbk. -0.005510272 0.010394292 -0.025466359 0.033898829 0.014822847 -0.012970532 21 Indah Kiat Pulp & Paper Tbk. -0.019256581 -0.010434869 -0.018671559 0.025064473 0.028908345 -0.004009076 22 Indocement Tunggal Prakarsa

Tbk. -0.007187211 -0.004677251 -0.004668705 0.013934893 0.017384084 -0.001682975 23 Indo Tambangraya Megah Tbk. 0.00316918 0.009828873 -0.00189406 0.003736251 -0.013369765 0.017580949 24 Jasa Marga (Persero) Tbk. -0.00228298 0.003743629 -0.008557144 0.009299363 -0.00000787 0.005975625 25 Kalbe Farma Tbk. -0.005818862 -0.00029763 -0.014319392 -0.004153658 -0.007027446 -0.008768627 26 Matahari Department Store Tbk. -0.01477891 0.022913524 0.004294067 -0.004187666 0.007311791 -0.023204879 27 Medco Energi Internasional

Tbk. -0.00218301 0.016863024 0.000069204 0.002692864 -0.010257453 0.011578605 28 Media Nusantara Citra Tbk. 0.010158607 0.03077474 0.021219353 0.026337172 -0.008925843 0.008985895 29 Perusahaan Gas Negara Tbk. 0.006258916 0.004003912 -0.003065784 0.00813634 0.004437954 0.004308449 30 Bukit Asam Tbk. -0.004366386 0.007432825 -0.009295298 -0.001476793 0.00449179 -0.001748527 31 PP (Persero) Tbk. 0.015140752 -0.004979783 -0.015145552 -0.001013192 0.015401414 0.005438121 32 Pakuwon Jati Tbk. -0.00757762 0.000178728 -0.002474419 0.006096924 -0.009118575 -0.001712756 33 Surya Citra Media Tbk. 0.006741934 0.002673761 -0.004713799 -0.004429434 0.019133505 0.00658521 34 Semen Indonesia (Persero) Tbk. -0.008423679 -0.002709628 0.002034978 -0.00378562 0.008462799 -0.0015452 35 Sri Rejeki Isman Tbk. -0.002305753 0.00249031 0.01048599 -0.008727649 0.004166845 -0.000575888 36 Pabrik Kertas Tjiwi Kimia Tbk. -0.00076105 -0.007993838 -0.047542557 0.042908645 0.014606899 -0.000780418 37 Telekomunikasi Indonesia

(Persero) Tbk. -0.004968445 0.001659431 -0.002557708 0.005668663 -0.001843062 0.00234915 38 Chandra Asri Petrochemical

Tbk. 0.000072712 -0.001521037 -0.007801157 -0.002947956 0.010979102 -0.005105538 39 United Tractors Tbk. 0.000196125 0.016283959 0.001585048 -0.003309522 0.002456942 0.001601871 40 Unilever Indonesia Tbk. 0.001794833 -0.007707815 0.000594097 -0.002139335 -0.007403615 -0.001775805 41 Wijaya Karya (Persero) Tbk. 0.011146726 -0.00273318 -0.012468798 0.013735362 0.011495003 0.009941051 42 Waskita Karya (Persero) Tbk. 0.012936391 -0.000645586 -0.012117098 0.009404157 0.009376306 0.001715058

Source: www.finance.yahoo.com(Data processed, 2019)

The results of the Kolmogorov Smirnov normality test for 3 event window period of the 2019 Presidential Election as follows:

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Table 2: Normality Test

One-Sample Kolmogorov-Smirnov Test Event 1

Before After

N 42 42

Normal Parameters^a,b Mean .000474297225614 .001821028231803

Std. Deviation .009609548686739 .009546551271640

Most Extreme Differences Absolute .136 .148

Positive .136 .148

Negative -.082 -.104

Test Statistic .136 .148

Asymp. Sig. (2-tailed) .050^c .022^c

Before After

N 42 42

Normal Parameters^a,b Mean -.005400345667777 .005810379921475 Std. Deviation .010721286028778 .011015703066102

Positive .149 .158

Asymp. Sig. (2-tailed) .040^c .010^c

Before After

N 42 42

Normal Parameters^a,b Mean .002602936707001 .000964080707812

Std. Deviation .012022862357115 .008408585012538

Positive .084 .051

Asymp. Sig. (2-tailed) .200^c,d .020^c

Source: Data processed, 2019

Based on the results of the normality test in first event showed that 5 days before the event the data was normally distributed, but after the event, the data was not normally distributed. In second event, both the data before and after the event were not normally distributed. And in the third event, the data before the event showed normally distributed. But the data after the event showed not normally distributed. Since the data was not normally distributed, the comparative test was using the Wilcoxon signed rank test model as follows:

Table 3: Comparative Test

The Wilcoxon Signed Rank Test Model for Event 1

N Mean Rank Sum of Ranks

Before - after Negative Ranks 17^a 23.53 400.00

Positive Ranks 25^b 20.12 503.00

Ties 0^c

Total 42

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Test Statistics^a

Before -after

Z -.644^b

Asymp. Sig. (2-tailed) .520

Negative Ranks 9^a 14.78 133.00

Ties 0^c

Total 42

V5 - V4

Z -3.982^b

V5 - V4 Negative Ranks 23^a 21.78 501.00

Ties 0^c

Total 42

V5 - V4

Z -.619^b

Source: Data processed, 2019

Based on table 3 above, in the first event, there were 25 companies had positive results with average abnormal return of 20.12% and 17 companies had negative result with average abnormal return of 23.53%. It reflected that there was an element of information that was absorbed by the market as positive occurrence. This also showed that the market welcomes the information that occurred on the 2019 Presidential Election. Although predominantly positive occurrences around 5 days before and 5 days after the first event window, there were no significant differences before and after the first event window. That happened because many survey institutions conducted the electability of the candidates. Based on the information received, the market had already anticipated to minimize the risk of trading that might occurred.

This was in line with Suwaryo (2008) and Trisnawati (2011) research that found there was no significant differences during the Presidential Election in 2004.

In the second event, there were 33 companies had positive result with average abnormal return of 23.33% and 9 companies had negative result with average abnormal return of 14.78%. The positive trend in the second events received by investors confirms that there was information was absorbed by investors in determining their actions in the 5 days before and 5 days after the recapitulation result of the Presidential Election. The statistical test showed there was a significant difference in abnormal returns on stocks listed the LQ45 index. This also inline with

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Trisnawati (2011) research that found there was significant differences during the Presidential Election in 2009.

And the last is in the third event, there were 19 companies had positive result with average abnormal return of 21.16% and 23 companies had negative result with average abnormal return of 21.78%. Same as the first event, in the third event window period showed that there was no significant difference. This happened due to the result of the President Election had already determined earlier through Constitutional Court Trial and also at that time in the third quarter, Indonesia’s economy experienced slowdown of. 5.02% growth, which was below the expectation of 8% growth. Earlier Bowes (2018) stated that the market would less volatile if the publicly relevant information becomes certain.

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