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 a country’s information environment and correlations in investors’ trading activities. 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 co-movements. These results hold after accounting for endogeneity. Our study suggests that culture is an important omitted variable in the literature that investigates cross-country differences in stock price co-movements.
JEL classification: G15; G12; G02.
Keywords: Stock price synchronicity, culture, tightness, individualism, openness
