Culture and Stock Price Synchronicity: The Effects of Tightness and Individualism

Abstract

In this paper, we examine the effect of culture on cross-country differences in stock price synchronicity. We focus on two cultural dimensions. The first, tightness-looseness, relates to the external constraints on investors’ behavior that helps to explain the similarity/diversity in individual behaviors within a country (Gelfand et al., Science, 2011). The second, individualism- collectivism, focuses on the internal attributes that guide investor’s behavior and reflects the degree to which people focus on their internal attributes to differentiate from others (Hofstede, 1980). Together, tightness and individualism influence the inter-personal similarity/diversity of behaviors and the tendency to think holistically/analytically, which are likely to affect stock price synchronicity. Using stock returns of 45 countries from 1990 to 2010, we find a higher stock price synchronicity in countries with a tighter and less individualistic culture. Both market-wide and firm-specific stock return variations are lower (higher) in countries that are culturally tight (loose). On the other hand, individualism just increases firm-specific variations. The marginal effect of culture on stock price synchronicity is comparable to those of previously documented determinants of stock price synchronicity, such as good government index and information opaqueness. We also find that the influence of culture on the stock price co-movement is weaker in countries that are more open to trade and more integrated with the global stock market. Taken together, our study suggests that culture is an important omitted variable in the literature that examines cross-country differences in the stock price co-movement.