The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?

Abstract

Stock prices move together more in low-income economies than in high-income economies. This finding is clearly not due to market size differences, and is only partially explained by slightly higher fundamentals correlation in low-income economies. However, measures of a country?s institutionalized respect for property rights do appear to explain these differences. We conjecture that weak private property rights impede informed trading and increase systematic noise trader risk. We also conjecture that, in countries that protect public investors poorly from corporate insiders, intercorporate income shifting may make firm-specific information less useful to risk arbitrageurs and therefore impede its capitalization into stock prices. Although our tests support these conjectures to some extent, we invite other explanations of our main finding.