Institutional shareholdings and the January effects in Taiwan

Many studies have documented the “January Effect” across stock markets. In this paper, we investigate the existence of a January Effect in the Taiwanese market. We document a statistically significant January return, consistent with previous research. However, we also document a new pricing anomaly that appears to exist during the post-liberalization “Great Recession” period of 2005-2010, namely, a “Reverse January Effect”, of statistically significant lower returns during January. Furthermore, we examine the role of three types of institutional investors, and their differential impact on market efficiency in Taiwan. Our results indicate that for the overall time period, foreign institutional investors and domestic investors mitigate the January effect, whereas domestic trusts do not. However, when we segment across time periods, we find that pre-liberalization, when foreign institutional ownership was low, only the domestic institutions promoted efficiency by reducing the January effect. In the 2005-2010 post liberalization period, we find that while FIIs reduce the magnitude of the “Reverse January Effect”, domestic institutions exacerbated it. Domestic trusts appear to have no impact on the January Effect. Taken together, our results provide interesting insights into liberalization and emerging markets. We find that an explanation for the January Effect is related to the participation by various types of institutions in the market. Further, it appears that foreign institutions require a learning curve in terms of efficient pricing, but that greater foreign institutional ownership can ultimately promote greater market efficiency.