Industry Structure and Stock Price Synchronicity
92 Pages Posted: 15 Apr 2014 Last revised: 7 Feb 2018
Date Written: January 12, 2018
This paper provides an alternative explanation for the disparity in stock price synchronicity that is not related to the information hypothesis. Using a panel of listed firms in 40 countries, 30 industry sectors, and over 18 years, our baseline country-year panel results show that proprietary rights protection, stock market volatility, and market size have significant impact on stock price synchronicity, which is consistent with the early information-based literature. However, when we add industry structure measures to the panel models, we find that the explanatory effects of the information-based variables are weakened, and in some instances, disappear. Most importantly, we find that the industry structure measures, which include both the pair-wise correlations and the volatility spillovers of firm returns, exhibit highly significant and positive effects on cross-sectional and temporal variations in price synchronicity. The results imply that tighter industry structure (with less diversity in firms) leads to higher R2, and the industry structure offers a non-information-based explanation to the international disparity in R2.
Keywords: Price Synchronicity, Market Capitalization, Property Rights Protection, Industry Structures, Information Hypothesis, Market-wide risk
JEL Classification: G14, G15
Suggested Citation: Suggested Citation