Governance quality, bank price synchronicity and political uncertainty

Abstract

This paper examines the relation between the quality of country-level governance and the synchronicity in the stock prices of commercial banks during the period from 2002 to 2014. Using a new database that covers 39 countries, we find strong and robust evidence that country-level governance quality is associated with lower stock price synchronicity for banks in emerging economies, but the effects of the governance in developed countries are either positive or insignificant for variations in the co-movements of stock prices. We also investigate how political uncertainty affects the effect of country-level governance on the synchronicity of bank stock returns. Our finding shows that political uncertainty has a positive and significant effect on the relation between country-level governance and the synchronicity in the stock returns of banks across countries. The results also show that the magnitude of political uncertainty also varies with different electoral characteristics and political systems. This variation means that politics is an important channel through which the institutional environment influences the flow of bank-specific information that investors incorporate into stock prices.