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Culture and R2

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  • Eun, Cheol S.
  • Wang, Lingling
  • Xiao, Steven C.

Abstract

Consistent with predictions from the psychology literature, we find that stock prices co-move more (less) in culturally tight (loose) and collectivistic (individualistic) countries. Culture influences stock price synchronicity by affecting correlations in investors׳ trading activities and a country׳s information environment. Both market-wide and firm-specific variations are lower in tighter cultures. Individualism is mostly associated with higher firm-specific variations. Trade and financial openness weakens the effect of domestic culture on stock price comovements. These results hold for various robustness checks. Our study suggests that culture is an important omitted variable in the literature that investigates cross-country differences in stock price comovements.

Suggested Citation

  • Eun, Cheol S. & Wang, Lingling & Xiao, Steven C., 2015. "Culture and R2," Journal of Financial Economics, Elsevier, vol. 115(2), pages 283-303.
    • Handle: RePEc:eee:jfinec:v:115:y:2015:i:2:p:283-303
    DOI: 10.1016/j.jfineco.2014.09.003
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    More about this item

    Keywords

    Culture; R2; Tightness; Individualism; Openness;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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