Synchronicity and Firm Interlocks in an Emerging Market

Abstract

Stock price synchronicity has been attributed to poor corporate governance and a lack of firm-level transparency. This paper investigates the association between different kinds of firm interlocks, control groups, and synchronicity in Chile. A unique data set containing equity cross holdings, common individual owners, and director interlocks is used to map out firm ties and control groups in the economy. While there is a correlation between synchronicity and shared ownership and equity ties, synchronicity is more strongly correlated with interlocking directorates. The presence of shared directors is associated with either reduced firm level transparency or increased correlation in firm fundamentals, for example due to joint resource allocation within the group. In this way, the results are consistent with models where firm interlocks facilitate coordination across firms and are also consistent with models where relationships affect capital allocation.