The impact of business group affiliation on stock price informativeness: Evidence from an emerging market

• Published date: 01 May 2019
• DOI: http://doi.org/10.1111/fmii.12111
• Author: Gokhan Yilmaz,Zenu Sharma,A. Melih Küllü,Doug Dyer
• Date: 01 May 2019

DOI: 10.1111/fmii.12111

ORIGINAL ARTICLE

The impact of business group affiliation on stock

price informativeness: Evidence from an emerging

market

A. Melih Küllü1Doug Dyer2Gokhan Yilmaz3Zenu Sharma4

1College of Business Administration,University

of CentralFlorida

2College of Business Administration, TexasA&M

University - CentralTexas Killeen

3Independent Researcher

4Lally School of Management, Rensselaer

PolytechnicInstitute Troy

Correspondence

A.Melih Küllü, College of Business Adminis-

tration,University of Central Florida, Orlando,

FL32816, USA.

Email:melihkullu@ucf.edu

Abstract

This paper examines the relationship between business group affil-

iation and stock price informativeness in an emerging market set-

ting. We use stock price synchronicity as a measure, and study the

impact of group affiliation -specifically the extent of affiliation, owner-

ship structure and existence of group bank- on firm specific informa-

tion content. Results revealthat the amount of firm-specific informa-

tion capitalized into stock prices tends to be lower (higher) when the

firm is group-affiliated (unaffiliated), indirectly (directly) owned, and

affiliated group has (does not have) a group bank. Additionally, the

extent of group affiliation maintains a non-linear relationship with

synchronicity,suggesting that the perception of higher versus lower

levels of group ownership differs.

KEYWORDS

business groups, emerging markets, information content, syn-

chronicity,Turkey

JEL CLASSIFICATION

G14, G15, G20, G34

1INTRODUCTION

Stock prices are a crucial source of information in financial markets. By providing updated market assessments on

the actual state of markets and listed firms, they provide information —both market-specificand firm-specific—through

the capitalization of such assessments into market prices. Stock prices tend to move in a synchronized way,and the

extent of this synchronized movement differs from market to market. Specifically, synchronicity tends to be lower

in developed (more efficient) markets and higher in developing (less efficient) emerging markets (Morck, Yeung, & Yu,

2000). Lower (higher) stock-price synchronicity is associated with higher (lower) firm-specific information content, and

a significant part of stock price variation cannot be explainedby market-specific fluctuations (Roll, 1988). Firm-specific

c

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Financial Markets,Inst. &Inst. 2019;28:187–212. wileyonlinelibrary.com/journal/fmii 187

188 KÜLLÜ ET AL.

return variation has been examined to evaluate firm performances, such that increases in the extent of firm-specific

information content are expected to lead to more informative prices that enable more revealing signals to be sent

to various corporate stakeholders, specifically investors, managers, creditors, and regulators. Each of the parties

may interpret these signals from their respective viewpoints at different levels. Nevertheless, they all value stock

price informativeness, which is associated with more informed trading (Durnev, Morck, Yeung, & Zarowin, 2003).

Hence, studying the observed synchronicity and stock-price informativeness is essential to better understanding the

valuation and assessment of firms and their structural and operational strategies.

Stock price movements in emerging marketsare shown to be more synchronous (indicating less firm-specific infor-

mation) (Morck et al., 2000). These marketshave also become more significant players (due to their rapid growth rates,

increasing population, dynamic internal demand, and abundant resource availability) within the global economy in

recent decades. Key similarities existamong these emerging markets in contrast to developed markets, however each

of these emerging markets also present a unique setting due to their individual characteristics. Consequently, they

emerge as proper settings for examining information content and its determinants.

In these emerging markets, concentrated ownership structures are highly observedin the form of business groups

(La Porta, Lopez-de-Silanes, Schleifer,& Vishny, 1998). These groups are major sources of power, are responsible for

a large fraction of economic activity,and they control a substantial part of the country's productive assets (Weinstein

& Yafeh, 1995). These entities are associations of legally independent firms that are bound together with formal or

informal ties, and act in coordination (Khanna & Rivkin, 2001). Corporate control in these groups is generally estab-

lished by the separation of voting rights fromcash-flow rights via stock pyramids, cross-ownership ties, and dual-class

share structures (Bebchuk, Kraakman, & Triantis,1999). In terms of establishing control and coordination within such

group firms, the structure of business groups and group-firm characteristics emerge as important study subjects with

regard to information transfer.In particular, group affiliation, affiliation extent (ownership percentage),ownership struc-

ture (direct vs. indirect), and existenceof a group bank are expected to have an impact on the firm-specific information

content and consequently on the market valuation of group firms.

Therefore, this study focuses on the firm-specific information content in stock prices, using stock-price synchronic-

ity (“R2”) as a measure, in accordance with the literature (Jin & Myers, 2006; Morck et al., 2000).1It examines the

relationship between business group affiliation and stock price information content in a high-growth, but less studied,

emerging market setting: Turkey2.Business groups (holdings) play a dominant role in the Turkish economy and around

its neighboring regions.3Turkey, one of the fastest growing world economies, emerges as a unique and important set-

ting in which to examine business groups and information content.

We aim to explore the impact of group affiliation—specifically, the extentof affiliation, ownership structure, and

existence of a group bank—on firm-specific information content in stock prices, and at increasing our understanding

of stock price informativeness in emerging markets and ultimately in all markets. Existing research provides useful

information on such topics as the formation of business groups (Almeida, Park, Subrahmanyam, & Wolfenzon, 2011),

joint control and interlocks from a network perspective (Khanna & Thomas, 2009), and ownership concentration and

governmentownership (Gul, Kim, & Qiu, 2010). However, business groups and business group affiliation have not been

directly studied in terms of firm-specific information content in stock prices. This study aims to fill the gap, and to

contribute to the literature by examiningbusiness group structure and strategies directly.

We obtain our data from three different sources – DataStream, Borsa Istanbul and Capital Markets Board. We

identify business groups by collecting ownership data from Borsa Istanbul, and further augment this data by hand-

collecting information from firm and group websites. Our measure for synchronicity is the logarithm of the ratio of

R2and one minus R2obtained from regressing firm weekly level returns in the market. Using an unbalanced panel of

228 non-financial firms over the period 2005–2008, we find that having group affiliation is highlysignificant and posi-

tively related to synchronicity,indicating that less firm-specific information is incorporated into the prices. Moreover,

the extentof affiliation (group ownership percentage) has a highly significant positive impact. However,the relationship is

nonlinear,meaning that up to a certain point synchronicity is expected to increase along with the group ownership level,

while after that point higher ownership is expectedto decrease the synchronicity (increase the firm-specific information).

Whereas, at lower ownership levels tunneling and managerial entrenchment concerns may contribute to information