“Do Foreigners Facilitate Information Transmission?” by Hongping TAN
University of Northern British Columbia
University of North Carolina at Chapel Hill
Using the degree of accessibility of foreign investors to emerging stock markets, or investibility, as a proxy to measure the severity of market frictions in affecting stocks in local markets, we assess whether investibility has a significant influence on the lead-lag relation of stock returns in emerging markets, and whether this is due to slow diffusion of common information across stocks. We show that returns of highly-investable stocks that allow large access of foreign investment lead returns of non-investable stocks that are closed to foreign investors, but not vice versa. Moreover, this lead-lag effect is not driven by other known determinants such as size, trading volume, or analyst coverage, nor is it due to intra-industry leader-follower effect. These patterns arise because prices of highly-investable stocks adjust faster to market-wide information. Greater investibility reduces the delay with which individual stock prices respond to the global and local market information. The results are consistent with the idea that financial liberalization in the form of greater investibility yields more informationally efficient stock prices in emerging markets.