My 2012 thesis investigated the equity market reaction to events surrounding reforms in the quality and levels of minority shareholder protection, in particular country jurisdictions. The analysis was carried out using one minority shareholder legal protection reform that was enacted in Saudi Arabia and two reforms enacted in Tunisia from late 2007 until early 2009.

The results of event study analysis fail to offer consistent support for the law and finance argument that the firms’ share prices should react positively to events surrounding these reforms enactments. Nevertheless, the cumulative abnormal returns show occasional statistical significance over multiple events, these returns are with mixed signs and the bulks are negative. More importantly, when computing the aggregated cumulative abnormal return for all events for every one of the three reforms, the results failed to find robust evidence of any statistically significant CAR, suggesting that investors did not view the three minority shareholder reforms as value-relevant or significant for any enhancement of their investments.  Moreover, while the results for the two countries showed occasional and inconsistent signs, it showed very small consistent positive significant reaction to the passage of the reforms by the competent legislative authorities.

A possible interpretation for these mixed results is the potential that the market may have deemed these reforms as a political response to a sharp decline in the market capitalisation, or as a response to international institutions, such as the IMF and the World Bank, as well as reform requirements in financial systems. Hence, market participants believe that such reforms will not have any significant impact on their investment activities. Another possible interpretation of these results is that the reforms were surrounded by wide media coverage on the justifications for such reforms, highlighting the shortcomings of the minority shareholder protection mechanisms. Hence the markets in both countries may have been disappointed with the lack progress in their minority shareholder protection regimes. More importantly, the nature of concentrated ownership structure of both countries and the possible competing interests among different shareholders may explain the ambiguous statistical results. Majority shareholders may perceive these reforms as anti-business legislation and/or reduce their opportunities to expropriate minority shareholders, and hence react negatively to the reforms and offset the possible positive reaction of minority shareholders.

Moreover, in light of different studies that signify the inefficiency of MENA equity markets even in the weak form level, the Efficient Market Hypothesis (EMH) would not offer a good explanation for the lack of statistical significance of the results.

The results of event study analysis generally provide some support for previous studies mixed results. Although cumulative abnormal returns show occasional statistical significance, the results of the three reforms failed to offer consistent support for the law and finance argument concerning the association between improvement of minority shareholder protection level and a firms’ share prices.

-This is an excerpt from my PhD thesis 2012