Ownership Structure and Stock Price Synchronicity - Evidence from an Emerging Market

Ownership Structure and Stock Price Synchronicity:

Evidence from an Emerging Market^[1]

Ownership Structure and Stock Price Synchronicity:

Evidence from an Emerging Market

Abstract

Stock prices move together more in poor economies than in rich economies. This finding is not due to market size and is only partially explained by higher fundamentals correlation in low income economies. Using a sample of all the NSE listed firms over the period 2001-2015, we examine the impact of various macroeconomic and corporate governance/structure characteristics namely Ownership Structure & Promoter shareholdings pattern on the stock price synchronicity measure in Indian Markets over the study period. We also do a theoretical literature study as to how characteristics that proxy for “Investor Rights protection”, “Rule of law” and “Interlocking firm directorates and equity shareholdings interlocks “affect the price synchronicity in emerging markets. Our results evidently validate our theory on the temporal impact on the synchronicity measures attributed to promoter shareholdings pattern and ownership structure; complementing the existing literature that, controlling shareholders have a detrimental influence on the firm specific fundamentals and the stock price synchronicity in Indian Markets. The most important conclusion to come out of our analytical study is that big private business groups tend to have higher stock price synchronicity among them, owing to corporate governance mechanisms.

JEL Classification: G14, G18, G32, G38

Keywords: Corporate Governance, Board of Directors, Ownership Structure, Promoter Shareholdings

1. Introduction

The word synchronicity is used in this situation to capture the tendency of share market prices to move in the same direction in a particular period of time, in our case, on a bi-weekly basis. Stock prices move together more in poor developing economies than in rich   developed economies. This finding is not due to market size and is only partially explained by higher fundamentals correlation in low income economies. However, measures of property rights and the lack of protection of investor property rights in poor economies do explain this difference. The systematic component of returns variation is large in emerging markets, and appears unrelated to fundamentals co-movement, consistent with noise trader risk. Among developed economy stock markets, higher firm-specific returns variation is associated with stronger public investor property rights. We propose that strong property rights promote informed arbitrage, which capitalizes detailed firm specific information into prices. Synchronicity in returns data, controlling for correlation in firm fundamentals, is attributed to blurred boundaries between firms, reducing the firm-specific information incorporated in stock prices.