Culture and R2
Cheol S. Eun
Georgia Institute of Technology - Finance Area
Tulane University - Finance & Economics
Steven Chong Xiao
Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick
April 23, 2014
Journal of Financial Economics (JFE), Forthcoming
Consistent with predictions from the psychology literature, we find that stock prices co-move more (less) in culturally tight (loose) and collectivistic (individualistic) countries. Culture influences stock price synchronicity by affecting correlations in investors’ trading activities and a country’s information environment. Both market-wide and firm-specific variations are lower in tighter cultures. Individualism is mostly associated with higher firm-specific variations. Trade and financial openness weakens the effect of domestic culture on stock price comovements. These results hold for various robustness checks. Our study suggests that culture is an important omitted variable in the literature that investigates cross-country differences in stock price comovements.
Number of Pages in PDF File: 47
Keywords: stock price synchronicity, culture, tightness, individualism, openness
JEL Classification: G15, G12, G02
Date posted: August 25, 2013 ; Last revised: April 26, 2014
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