Cultural New Year Holidays and Stock Returns around the World

• Author: Kelley Bergsma,Danling Jiang
• DOI: http://doi.org/10.1111/fima.12094
• Published date: 01 March 2016
• Date: 01 March 2016

Cultural New Year Holidays and Stock

Returns around the World

Kelley Bergsma and Danling Jiang∗

Using data from 11 major international marketsthat celebrate six cultural New Yearholidays that

do not occur on January 1, we find that stock markets tend to outperform in days surrounding a

cultural New Year. After controlling for firm characteristics, an averagestock earns 2.5% higher

abnormal returns across all marketsin the month of a cultural New Year relative to other months

of the year. Further evidence suggests that positive holiday moods, in conjunction with cash

infusions prior to a cultural New Year, produce elevated stock prices, particularly among those

stocks most preferredand traded by individual investors.

Despite cultural differences that set people apart, there exist certain universal themes that

bring people together. One such theme is a common sense of optimism at the beginning of

a new year. People throughout history have celebrated the hope of a happier tomorrow at the

advent of a new year. For the Western world, the New Year falls on January 1, the beginning

of the Gregorian calendar year; however, other cultures celebrate different New Years according

to their traditional calendars. For example, China’s New Year (Spring Festival) falls in January

or February, Thailand’s New Year (Songkran) falls in mid April, and Israel’s New Year (Rosh

Hashanah) falls in September or October. While these cultural New Year holidays are celebrated

with different traditions and at different times of the year, these New Year celebrations all share

a common uplifting mood and, in many cases, individuals enjoy cash infusions, in the form of

employee bonuses, prior to the cultural year-end.

Weexamine how this shared optimistic mood around cultural New Year holidays impacts stock

markets worldwide and how cash infusions and the dominance of individual investors facilitate

this process. Specifically, we study equity performance in 11 major international stock markets

from 1991 to 2011 surrounding six cultural New Year holidays (e.g., Chinese, Islamic, Jewish,

Korean, Sinhalese, and Thai New Year holidays) and find that stock markets tend to outperform

surrounding the cultural New Year. We further demonstrate that this cultural New Year effect is

most pronounced among stocks with characteristics favored by individual investors, such as low

price, high idiosyncratic volatility, and high past extreme daily returns. This individual investor

clientele effect is stronger among countries where employees receive bonuses at the turn of the

cultural New Year.

Weare grateful to Marc Lipson (Editor) and an anonymous refereefor helpful comments and suggestions. We also thank

James Ang, Don Autore, Paul Hanouna, Gabriele Lepori, Meagan McCollum, David Peterson, Lingling Wang, Stefan

Zeisberger, and seminar participants at Florida State University, the Academy of Behavioral Finance & Economics

2012 Annual Meeting, and the 2013 Financial Management Association Annual Meeting. We want to thank Hope Han,

Jon Graves, and Darren Pope for helpful research assistance and Suzanne Hannay and Wendy Jennings for excellent

proofreading.This paper is derived, in part, from Kelley Bergsma’sPh.D. dissertation at Florida State University. Weare

responsible for all remainingerrors and omissions.

∗Kelley Bergsma is an Assistant Professor of Finance in the College of Business at Ohio University in Athens, OH.

Danling Jiang is the SunTrust Professorand Associate Professor of Finance in the College of Business at Florida State

University in Tallahassee,FL.

Financial Management •Spring 2016 •pages 3 – 35

4Financial Management rSpring 2016

Our contribution to the literature is to demonstrate how a transcendent theme across cultures

at different times of the year is associated with a similar pricing effect across international

equity markets. In contrast, prior work on culture and finance has primarily focused on how

cultural differences lead to different effects in international financial markets. For example,

differences in religion explain variations in creditor rights across nations (Stulz and Williamson,

2003). In addition, cultural differences can lead to differing impacts of social interaction on

individual trading decisions (Ng and Wu, 2010). Further, differentlevels of individualism among

cultures affect herding behavior,trading volume, volatility, momentum, and corporate risk-taking

(Beckmann, Menkhoff, and Suto, 2008; Chui, Titman, and Wei, 2010; Li et al., 2013). In contrast,

we posit that a similar optimistic mood around cultural New Year holidays will result in a similar

positive effect on stock prices across different cultures.

Our study is related to the prior investormood literature that primarily focuses on mood changes

prompted by exogenous shocks (e.g., sunshine, sports teams’ performance, or aviation disasters)

and finds that these mood changes influence aggregate stock market performance (Saunders,

1993; Hirshleifer and Shumway, 2003; Edmans, Garc´

ıa, and Norli, 2007; Kaplanski and Levy,

2010). Yet, these proxies for mood state are not known ex ante, making it difficult to exploit

the direct effect of mood on security prices. In contrast, holidays as proxies for mood swings

are predictable, as the dates of holidays are scheduled far in advance. Thus, the pricing effect of

investor mood surrounding holidays is more likely to be exploitable.1

Another line of research, including Frieder and Subrahmanyam (2004), Bialkowski, Etebari,

and Wisniewski (2012), and Kaplanski and Levy (2012), has recognized holidays as a proxy

for investor mood. However, none of these studies examines different cultural holidays across

multiple nations and the cross-sectional differences in the effect of holidays on individualstocks,

which are our focus. For instance, Bialkowski et al. (2012) study aggregate stock market returns

across different international markets for the single holy month of Ramadan and find a Ramadan

effect only in those countries that are predominantly Muslim. In contrast, we examine distinct

cultural New Year holidays across a set of major international markets with different religions

and traditions, guided by the idea that optimism around the cultural New Year is common across

cultures.

Moreover, our study provides a clean test of our hypotheses in that it is unclouded by tax

loss selling or short selling. Unlike the January 1st New Year, many of these cultural New Year

holidays do not fall on the same day or even the same month year after year in the Gregorian

calendar. Thus, the cultural New Year does not usually coincide with the tax year and, even when

it does, a majority of the markets in our sample do not impose a separate capital gains tax.

Therefore, our tests are not confounded by tax loss selling, a common explanation for the January

effect (Reinganum, 1983). Nor are our findings explained by short selling activity as our results

remain significant when we exclude countries that allow short selling (Fields, 1934).

While the January effect in Western markets has been extensively studied, our study is the first

to comprehensively examine stock market performance surrounding diverse cultural New Year

holidays across significant international markets. The countries in our sample account for over

27% of the world’s population and nearly 20% of the world’s total market capitalization. In our

empirical tests, we determine that stock returns are significantly higher in the days surrounding

the cultural New Year relative to other trading days of the year after controlling for those days

surrounding January 1 (as the January effect is present in several countries in our sample). At

1Fields (1934), Lakonishok and Smidt (1988), Ariel (1990), and Kim and Park (1994) find that stock markets exhibit

abnormally high mean returns on the trading days prior to major holidays, but none of these studies link the holidayeffect

with investor mood.

Bergsma & Jiang rCultural New Year Holidays and Stock Returns 5

the aggregate level, the average dailycountr y portfolio return is 21 basis points higher during the

(–4,+4) window surrounding the cultural New Year’s Day as compared to daily returns during

other days, after adjusting for worldmarket risk and controlling for the Januar y effectand countr y

fixed effects (e.g., Table II).2Further, this cultural New Year effect is present across most of our

sample countries (e.g., TableIII) and is observed in both the earlier and later sample periods (e.g.,

Tab le I I) .

In addition to testing at the aggregate country portfolio levels, we also test at the individual

stock levels, an avenue rarely explored by prior work on holidays or mood. Using a rich panel of

monthly firm-level characteristics and returns, we find that the cultural New Year effect remains

economically and statistically significant in a majority of our sample countries after controlling

for the January effect and the firm characteristics of market capitalization, book-to-market ratio,

short run past return, momentum, and illiquidity. The monthly abnormal stock return is, on

average, 2.50% higher in the cultural New Year month, the month in which a majority of the

(–4,+4) window around the cultural New Year’s Day falls, as compared with other months (e.g.,

Tab le I V) .

To provide further evidence that the cultural New Year effect is induced by investor mood

swings surrounding the cultural New Year, we determine whether a certain subset of individual

stocks experience a stronger impact from the cultural New Year. We hypothesize that individual

investors are more subject to the influence of mood and, as such, expect a stronger mood effect

on the subset of stocks that individual investors tend to trade. Specifically, we identify stocks

with an individual investor clientele using a composite individual investor clientele index that

incorporates three stock features: 1) low stock price, 2) high firm-specif ic volatility, and 3)

high past extreme daily return (Kumar, 2009; Bali, Cakici, and Whitelaw, 2011). Using panel

regressions that control for firm characteristics, we find that stocks with an individual investor

clientele significantly outperform their counterparts traded in the same countr y during the cultural

New Year month. Further cor roborating evidence indicates that stocks in countries with a lower

concentration of institutional ownership exhibit a stronger cultural New Year effect. Collectively,

this evidence suggests that investor mood affects stock prices through the channel of individual

investors’ trading.

Finally, we find that cash infusions, in the form of employee bonuses distributed at the cultural

year-end, contribute to the influence of investor holiday mood on stock prices. Upon a positive

cash infusion, investors, under an optimistic holiday mood, are more likely to favor equity over

bonds as optimism induces greater risk-taking (Forgas, 1995). In the presence of borrowing

constraints, stock investment is made possible bya cash infusion. Consistent with this hypothesis,

for the subset of markets where investors experience a cash infusion prior to the cultural New

Year holiday, the abnormal returns around the cultural New Year remain significantly more

pronounced for individual investor clientele stocks (e.g., Table VI). However, for the remaining

subset of markets, this cultural New Year effect dissipates and stocks with an individual investor

clientele experience significantly lower, not higher, returns surrounding the cultural New Year

(e.g., Table VI).

The remainder of the paper is organized as follows. Section I provides the motivation and

hypotheses. The data set is outlined in Section II, while Section III discusses the empirical results.

Section IV presents tests of alternative hypotheses and Section V provides our conclusions.

2The world market risk-adjusted return is defined as the abnormal return relative to a world market model, where the

world market is the Datastream WorldMarket Index.