Firm Product Similarity and Stock Price Comovement: Evidence from China

Abstract

ABSTRACT This article examines the effect of firm product similarity on stock price comovement. Using the financial data and annual reports of listed firms in the Chinese A-share market from January 2001 to December 2021, we find that firms with greater product similarity experience synchronized movements in their stock prices. This effect is driven by firm fundamentals, as demonstrated through major international events (Global Financial Crisis, European Sovereign Debt Crisis, and Trade Dispute between China and the U.S.) and domestic events (Two Sessions about the Deepening Overall Reform, and Central Economic Conference following the COVID-19 Outbreak). We also show that firms that release earnings announcements earlier contribute to the comovement of stock prices within their product-similarity cluster. Our findings are robust across various tests and provide insights into the dynamics of the Chinese A-share market.