Firm-Specific Variation and Openness in Emerging Markets

Abstract

Abstract-This paper compares the comovement of individual stock returns across emerging markets. Campbell et al. and Morck et al. have shown that the United States saw rising firm-specific stock return variations, and thus declining comovement, over the second half of the twentieth century. We detect a similar, albeit weaker, pattern in most, but not all, emerging markets. We further find that higher firm-specific variation is associated with greater capital market openness, but not goods market openness. Moreover, this relationship is magnified by institutional integrity (good government). Goods market openness is associated with higher marketwide variation.The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he has stumbled upon it without understanding it.Friedrich August von Hayek (1945)

Do Stock Prices in Turkey Reflect Fundamental Information? A Firm-Level Analysis

“…They find this pattern to be at least weakly similar to a rising trend of firm-specific return variation for the US stock market as documented in Campbell, Lettau, Malkiel and Xu (2001). In further analysis, Li et al (2004) also show that the firm-specific variation in their sample markets is significantly positively correlated with greater capital market openness and institutional development over the period. They rationalize their findings by arguing that greater openness and good institutions may have induced greater firm-specific variation of stock returns in those markets by facilitating a better impounding of firm-specific information into stock prices.…”

“…We observe that even though firm-specific returns volatility in Turkey shows a sharp declining pattern from about 0.35 in 1994 to about 0.20 in 1997, it remains largely stable over the rest of the sample period at around 0.20. Li et al (2004) also report that firm-specific volatility in Turkey in the latter part of the 1990s was significantly lower than the earlier part of the decade. The episode of relatively higher level of firm-specific returns volatility earlier in our sample period also coincides with a rather bleak economic outlook of the Turkish economy.…”

“…More recent evidence presented in Chan and Hameed (2006) and Fernandes and Ferreira (2009), however, contradicts Li et al (2004) position. Using firm-specific returns variation as a measure of the informativeness of stock prices, these two studies find either no, or even a negative, relationship between firm-specific returns variation in emerging markets and two specific measures of institutional development, namely, analysts' coverage and the enforcement of insider trading laws, respectively.…”

“…Interestingly, taking a time-series perspective, Li, Morck, Yang and Yeung (2004) report that firm-specific return variation in most of their seventeen sample emerging markets shows a rising pattern over the period from 1990 to 2000. They find this pattern to be at least weakly similar to a rising trend of firm-specific return variation for the US stock market as documented in Campbell, Lettau, Malkiel and Xu (2001).…”

Urban Economic Openness and IPO Underpricing

“…Li et al (2004) employ an openness approach to explain the increased firm-specific variation in the 1990s and find that capital market openness positively affects the firm-specific variation while trade openness positively affects the market variation. Basu and Morey (2005) argue that, once a country opens its trades to the world, stock prices start to follow a random walk whilst they were serially correlated beforehand.…”