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Impact of Capital Control on Stock Returns: Evidence from Malaysia

On September 1, 1998, the Malaysian government imposed capital controls in her financial markets, restricting the transfer of funds out of Malaysia. This study examines the impact of the Malaysian government’s action on the performance of the 100 stocks that make up the Kuala Lumpur Stock Exchange Index. We find that although there is a negative reaction to the news on the announcement day, the market gains about 70 percent four days later which do not dissipate even after 60 days. We also show that risky and inefficient firms enjoy significant abnormal returns due to capital controls.