Financial integration, investor protection and imbalanced optimistically biased information timeliness in emerging markets

Abstract

Principal-principal conflicts in many emerging markets can lead to an optimistically biased information environment. Using 24 emerging markets during the period 1996-2016, this paper examines how market-level, firm-level financial integration and investor protection quality jointly affect Imbalanced Optimistically Biased Information Timeliness (IOBIT). Results show that financial integration and investor protection quality affect good and bad information timeliness asymmetrically. Market-level financial integration augments IOBIT while firm-level financial integration and investor protection mitigate IOBIT. The effect of firm-level financial integration in mitigating IOBIT is reduced when market-level financial integration increases and/or investor protection becomes stronger. Our analysis enhances our understanding of the benefit-cost trade-off associated with financial integration in affecting information timeliness and the conditional factors in altering this benefit-cost trade-off in emerging markets.

Quantifying Information Flows among Developed and Emerging Equity Markets

“…Despite the enormous potential attributed to emerging markets, they possess enormous risks for investors. With relatively lower levels of financial development and weaker institutional structures, emerging economies are imbued with high levels of information asymmetries [21] and lower investor protection [22].…”

Integration, investor protection rules and global informational inefficiency of emerging financial markets

“…This has implications for emerging markets asset pricing models, the benefits from diversifying into emerging markets and the cost of capital. Li et al (2004), Bae et al (2012) and Zhang et al (2019) show a connection between financial market integration and information delay, whereas, Büttner and Hayo (2011), Li et al (2015) and Graham et al (2015) suggest that increasing integration raises the susceptibility of financial markets to cross-border crisis. The gains and costs of financial integration may be derived from the increased ability of financial markets to timely process global information upon integration.…”

“…Although, prior studies (see e.g. Morck et al 2000;Li et al 2004;Hooy and Lim 2013;Zhang et al 2019) have explored the diffusion of global news to emerging markets very little is known about the drivers of timely global information incorporation by these markets. This study builds on earlier studies and contributes to the discourse on the time series and cross-sectional changes in global information production by emerging market security prices.…”

“…In a recent emerging markets study, Zhang et al (2019) explore the influence of financial market segmentation and investor safeguarding rules on information timelag. By adopting the information timeliness measure proposed by Beekes and Brown (2006), they show that market integration and investor safeguard rules occasionally influence information delay.…”