Industry Structure and Stock Price Synchronicity

92 Pages Posted: 15 Apr 2014 Last revised: 7 Feb 2018

See all articles by Hao Cheng

Hao Cheng

Independent

Kian-Guan Lim

Singapore Management University - Lee Kong Chian School of Business

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate

Long Wang

ShanghaiTech University - School of Entrepreneurship and Management

Date Written: January 12, 2018

Abstract

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

Cheng, Hao and Lim, Kian-Guan and Sing, Tien Foo and Wang, Long, Industry Structure and Stock Price Synchronicity (January 12, 2018). Available at SSRN: https://ssrn.com/abstract=2425042 or http://dx.doi.org/10.2139/ssrn.2425042

Hao Cheng

Independent

No Address Available

Kian-Guan Lim

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road #05-01
Singapore, 178899
Singapore

Tien Foo Sing (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Long Wang

ShanghaiTech University - School of Entrepreneurship and Management ( email )

No.393 Middle Huaxia Road
Pudong district
Shanghai, AK Shanghai 210201
China

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