Stock price synchronicity and corporate governance mechanisms: evidence from an emerging market

Abstract

How and why do governance mechanisms affect stock price synchronicity in emerging markets? This paper aims to answer this question in the context of an emerging market. Using panel data with fixed effect regression model, we examine the relationship between various proxies of governance mechanisms (analyst following, ownership concentration, and operational complexity) and stock price synchronicity during the period between 2006 and 2008 in India. Our results show that firms with lower ownership concentration, higher analyst following, and lower operational complexity are associated with higher stock price synchronicity. We also show that our results are robust for a sub-sample of small and large firms. Given that firms with higher synchronicity are associated with better governance environment, we also show that firms with higher synchronicity have better firm performance than firms with lower synchronicity. Our results are important, especially for small/naive investors, because obtaining value relevant information is a hard task in information scarce emerging markets. Synchronicity, being publicly available information, provides an easy way for investors to differentiate between good and bad firms.