Market Reaction of the Indonesian Composite Index to MSCI Evaluation
Keywords:
Event Study, MSCI Evaluation, Abnormal Return, Capital Market Governance, Sustainable Financial MarketsAbstract
Global capital markets are increasingly influenced by evaluations conducted by international financial institutions and index providers. One of the most prominent institutions in this context is MSCI, whose market classification and governance assessments are closely monitored by global investors. This study aims to analyze the market reaction of the Indonesia Composite Index to the MSCI market evaluation announcement related to transparency and governance conditions in the Indonesian capital market. The research applies an event study methodology to identify abnormal returns and cumulative abnormal returns surrounding the announcement date. The event date is defined as 27 January 2026, with an event window of five trading days before and after the announcement (t−5 to t+5). Daily index closing price data are used to calculate returns, while expected returns are estimated using the Mean Adjusted Model based on historical data within the estimation window. Abnormal returns are calculated as the difference between actual returns and expected returns, and statistical significance is tested using a t-test. The results indicate that the Indonesian stock market experienced significant negative abnormal returns around the announcement date, with the largest decline occurring on the event day. The cumulative abnormal return during the event window reached approximately −4.0%, indicating a persistent negative market reaction following the announcement. Statistical testing confirms that the abnormal returns are significant at the 5% level. These findings suggest that institutional evaluations issued by global financial institutions contain important information that influences investor behavior in emerging markets. The results also highlight the importance of governance transparency and institutional credibility in supporting investor confidence and sustainable financial market development.
References
[1] E. F. Fama and K. R. French, “A Review of Market Efficiency and Asset Pricing,” Annual Review of Financial Economics, vol. 12, pp. 1–24, 2020.
[2] R. J. Shiller, “Market Efficiency Revisited,” Journal of Economic Perspectives, vol. 34, no. 3, pp. 67–88, 2020.
[3] C. K. Cowan and A. M. Sergeant, “Event Study Methodology in Finance: Recent Developments,” Journal of Corporate Finance, vol. 64, 2020.
[4] B. M. Barber and T. Odean, “Behavioral Finance and Market Efficiency,” Handbook of Behavioral Economics, vol. 2, pp. 345–412, 2021.
[5] J. Corrado, “Event Studies: A Methodological Review,” Financial Review, vol. 56, no. 1, pp. 207–234, 2021.
[6] S. Kothari and J. Warner, “Econometrics of Event Studies: Updated Perspective,” Foundations and Trends in Finance, vol. 15, no. 2, pp. 95–210, 2021.
[7] A. Damodaran, Applied Corporate Finance, 5th ed., Wiley, 2023.
[8] MSCI Inc., “MSCI Market Classification Framework,” MSCI Research Report, 2023.
[9] MSCI Inc., “MSCI Global Market Accessibility Review,” MSCI Report, 2024.
[10] S. Bekaert, C. R. Harvey, and C. Lundblad, “Emerging Markets Finance: New Evidence,” Journal of Financial Economics, vol. 144, no. 2, pp. 1–28, 2022.
[11] World Bank, “Global Financial Development Report 2022: Financial Stability,” World Bank Publications, 2022.
[12] International Monetary Fund (IMF), “Global Financial Stability Report,” IMF, 2023.
[13] M. A. Al-Yahyaee, “Stock Market Reaction to Announcements: Evidence from Emerging Markets,” Emerging Markets Review, vol. 52, 2022.
[14] H. N. Pham and T. Nguyen, “Event Study Evidence on Market Reaction to Policy Announcements,” Journal of Asian Economics, vol. 75, 2021.
[15] R. Arora and P. Bodhanwala, “Market Reaction to Corporate Announcements: Event Study Approach,” International Review of Financial Analysis, vol. 77, 2021.
[16] J. Li, Y. Gong, and X. Wu, “Cumulative Abnormal Returns and Market Efficiency,” Finance Research Letters, vol. 46, 2022.
[17] D. Zhang, M. Hu, and Q. Ji, “Financial Market Reaction to Global Events,” Economic Modelling, vol. 94, pp. 1–10, 2021.
[18] P. Narayan, “Do Markets React Efficiently to News?,” Journal of International Financial Markets, vol. 70, 2021.
[19] G. Brooks, “Statistical Testing in Financial Research,” Journal of Applied Econometrics, vol. 36, no. 4, pp. 567–589, 2021.
[20] J. Wooldridge, Introductory Econometrics: A Modern Approach, 7th ed., Cengage, 2021.
[21] United Nations, “The Sustainable Development Goals Report,” UN, 2023.
[22] OECD, “Corporate Governance Factbook 2023,” OECD Publishing, 2023.
[23] A. Serafeim, “ESG and Capital Markets: Recent Developments,” Journal of Finance, vol. 77, no. 4, pp. 1–35, 2022.
[24] M. Friede, T. Busch, and A. Bassen, “ESG and Financial Performance: Updated Review,” Journal of Sustainable Finance, vol. 12, no. 2, pp. 210–230, 2021.
[25] R. Albuquerque, Y. Koskinen, and C. Zhang, “Corporate Social Responsibility and Risk,” Journal of Finance, vol. 75, no. 6, pp. 2799–2837, 2020.
[26] S. Claessens and B. Yurtoglu, “Corporate Governance in Emerging Markets: Recent Evidence,” Emerging Markets Review, vol. 45, 2020.
[27] L. Guiso, P. Sapienza, and L. Zingales, “Trust and Financial Markets Revisited,” Review of Financial Studies, vol. 34, no. 2, pp. 1–29, 2021.
[28] J. Amihud, “Illiquidity and Stock Returns: New Evidence,” Journal of Financial Markets, vol. 54, 2021.
[29] K. Rouwenhorst, “Emerging Markets and Global Portfolio Allocation,” Journal of Investment Management, vol. 20, no. 1, pp. 1–15, 2022.
[30] UNDP, “Financing the SDGs in Emerging Markets,” UNDP Report, 2024.
[31] Aryonindito, S., Dahyar, S. S., Cempaka, A. G., & Saputro, V. S. Market reactions to domestic and global policy events: An event study of the Indonesian capital market in early 2025. International Journal of Management and Business Economics, vol 4, no.1, pp. 1–5, 2025.
[32] Kiky, A. Trump tariff on Indonesia stock exchange: Does the market recover one month after the announcement? ULTIMA Management, vol. 17, no. 1, pp. 63–73, 2025.
[33] Widyawati, K. A., & Wibowo, B. The effect of inclusion and exclusion indexes towards LQ45 and MSCI index on the pattern of stock return and stock trading volume. In Proceedings of the 1st International Conference on Sustainable Management and Innovation, ICoSMI 2020, 2021.
