Price Discovery, Foreign Ownership, and Rule of Law

Abstract:     
This paper aims to explore two issues. First, we examine the relation between intraday price dis-covery and proxies for financial openness or investor accessibility for a large cross-section of 23 emerging markets. Our sample covers 1,504 stocks over a period of eight months. We measure price discovery by weighted price contribution. We find that there is a reliable relation between early price discovery and direct foreign ownership in the underlying stocks after controlling for other factors. Greater price discovery is affiliated with a more significant presence of foreign investors in the home markets. Second, we extend the literature on law and finance to studies of market microstructure. We study the relation between the quality of legal environment to the speediness of price discovery. We find that a rule of law measure plays an important role in facilitating rapid price discovery. Our finding establishes a positive link between the quality of legal environment and efficiency of financial markets, where the latter is important for the ultimate goal of economic development.

Number of Pages in PDF File: 54

Keywords: Emerging Markets, Price Discovery, Weighted Price Contribution, Foreign Ownership, Market integration, Market Microstructure

JEL Classification: F30, F36, G10, G14, G15, G18

working papers series