Stock co-movement and governance bundles: Does the quality of national governance moderate this relationship?

Abstract

In this study, we examine if corporate governance, as a bundle, can better explain stock co-movement. To test the implication of governance bundles on stock co-movement, we consider a monitoring and incentive alignment bundle. Using 2,659 firm-year observations from 321 firms listed on the S&P 500 from 2009 to 2017, we find that the governance mechanism bundle can enhance the ability of stock prices to integrate better firm-specific information, which reflects on stock co-movement. In addition, we find the existence of a complementary relationship between National Governance Quality and a firm's board monitoring. This also helps in explaining the puzzle of stock co-movement. The findings will extend the understanding about the co-movement-related literature mentioned in the corporate governance and corporate finance research. The findings are also helpful for decision makers and policy makers involved in the efficient controlling of stock co-movement.