Foreign direct investment, deregulation, and stock market efficiency: evidence from the Indonesian capital market

In this article, the Indonesian stock market is examined to determine whether characteristics of the semi-strong form of the Efficient Market Hypothesis (EMH) are shown, and the association of foreign direct investment (FDI) and FDI-related deregulation with stock returns is also examined. Five methods are combined in this study: an event study, the APT, DiD, panel fixed-effects models, and LASSO regression. Archival data on Indonesian listed firms for the 2013–2020 period are used. Significant abnormal returns and cumulative abnormal returns around the 2016 FDI-related deregulation are found in the event study, and the strongest significance in the treated sample is found in the (−3, +3) window. However, uniform significance is not found across parametric and non-parametric tests. Therefore, a market response is indicated, but mixed evidence on semi-strong efficiency is obtained. In all analyses, heterogeneous and generally modest relationships between FDI, macroeconomic and institutional variables, and excess returns are found across sectors, while firm size and book to market factors are found to be more consistently relevant. Within the Adaptive Market Hypothesis, the effects of FDI and deregulation are interpreted as sector-dependent, and conclusions about market efficiency should be based mainly on the timing and persistence of abnormal returns.