Journal of Banking & Finance 46 (2014) 299–310

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Journal of Banking & Finance

journal homepage: www.elsevier.com/locate/jbf

Press freedom, externally-generated transparency, and stock price

informativeness: International evidence
Jeong-Bon Kim a, Hao Zhang a,⇑, Liuchuang Li b, Gaoliang Tian b
a
College of Business, City University of Hong Kong, Kowloon, Hong Kong, China
b
School of Management, Northwestern Polytechnical University, Xi’an, China

a r t i c l e i n f o a b s t r a c t

Article history: This paper examines the impact of press freedom on stock price informativeness in a sample of firms
Received 28 August 2013 from 50 countries. We find a significant relation between more press freedom and lower stock price syn-
Accepted 26 May 2014 chronicity. Our results suggest that the freedom of the press can enhance the information environment of
Available online 4 June 2014
stock markets.
Ó 2014 Elsevier B.V. All rights reserved.
JEL classification:
G14
G18
P16

Keywords:
Press freedom
Stock price informativeness
Market efficiency

1. Introduction external press reporting fills a transparency ‘‘gap’’ left by self-

Recent studies have shown that firm-level transparency, gener-
ated by quality financial reporting and disclosure, can enhance the
ability of stock prices to incorporate firm-specific information by
reducing stock price synchronicity (e.g., Jin and Myers, 2006;
Hutton et al., 2009; Kim and Shi, 2012; Jiang et al., 2013).1 The
press is said to able to generate transparency for firms through its
watchdog or monitoring function (e.g., Brandeis 1914; Miller
2006).2 Whereas the transparency produced by financial reporting
and disclosure is self-generated by firms, the transparency produced
through investigative and critical reporting is externally-generated by
the press.
Using a large international sample of 45,220 firm-years from 50
countries, this paper investigates a hitherto unexplored question of
whether externally-generated transparency can impact the ability
of stock prices to incorporate firm-specific information. We argue
that if there are things (e.g., corruption and fraud activities) that
firms are unwilling or unable to reveal through self-reporting,
⇑ Corresponding author. Tel.: +852 3442 8546.
E-mail address: haozhang@cityu.edu.hk (H. Zhang).
1
The underlying explanation is that the generated transparency is informative (the
information effect) and protects investors (the investor protection effect).
2
To quote Brandeis (1914), ‘‘Publicity is justly commended as a remedy for social
and industrial diseases. Sunlight is said to be the best of disinfectants; electric light
the most efficient policeman.’’
generated transparency and generates additional transparency
effects. Thus, we hypothesize that external transparency generated
by the press can enhance the ability of stock prices to incorporate
firm-specific information and thereby increase the functional effi-
ciency of stock markets (Tobin, 1982).
We measure the ability of the press in a country to generate
external transparency by the level of press freedom in the country
or how free the press is from state interference.3 We use two
empirical measures to proxy for press freedom, one based on a com-
posite of available indices on press freedom of a country in general
(PressFreecom_general) and the other based on the extent of state-
ownership of the press in a country (PreeFreedom_ownership). The
principal measure we use to proxy for stock price informativeness
is the inverse of stock price synchronicity developed by Morck
et al. (2000).4 We also use future earnings incremental explanatory
3
To the best of our knowledge, this study is the first to examine the relation
between press freedom and the ability of stock prices to inform. There is, however, a
growing literature that examines the relation between non-media institutions and
the ability of stock prices to inform (e.g., Jin and Myers, 2006; Ferreira and Laux, 2007;
Fernandes and Ferreira, 2008, 2009; Gul et al., 2010; Ferreira et al., 2011; Kim and Shi,
2012; Jiang et al., 2013).
4
Roll (1988) argues that synchronicity is inversely associated with the intensity of
informed trading based on firm-specific private information. Further, Ferreira and
Laux (2007) point out that the inverse of synchronicity is ‘‘a good summary measure
of information inflow, especially for private information about firms’’ (p. 952).

http://dx.doi.org/10.1016/j.jbankfin.2014.05.023
0378-4266/Ó 2014 Elsevier B.V. All rights reserved.
300 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310
power (FINC) as an alternative measure to check for robustness
(Durnev et al., 2003; Ferreira and Laux, 2007). Audit quality and
financial reporting quality variables are used to control for self-
generated transparency by firms.
We find a significant relation between more press freedom and
lower price synchronicity, suggesting the lack of press freedom
reduces the ability of stock prices to incorporate firm-specific
information and to inform investors of firm performance. This
result holds, irrespective of whether stock price informativeness
is measured at the firm level or at the country level. We also find
that press freedom is positively related to the ability of stock prices
to predict future earnings (as measured by FINC), similarly suggest-
ing that state interference of the press reduces stock price
informativeness.
We use two procedures to alleviate the concerns about poten-
tial endogeneity resulting from omitted variables and reverse cau-
sality. First, we use 20 country-specific indices to construct three
composite country-level controls (Financial Development Index,
Economic Development Index, and Legal/Political Development Index)
and include these controls in our regression model to control coun-
try-level differences. Second, we carry out a propensity score
matching (PSM) analysis. Specifically, we match a group of firms
from low press freedom countries with a group of PSM identical
firms from countries with high press freedom. We find that the
stock price informativeness is significantly higher in the former
group than the latter group, suggesting that externally-generated
transparency is a significant factor explaining stock price
informativeness.
Our study contributes to the extant literature in several ways.
First, this paper contributes to the stock price efficiency literature
by identifying the effect of a hitherto unexamined transparency
factor, namely, press freedom, on the ability of stock prices to
incorporate firm-specific information. In so doing, we add insights
into the channels through which transparency effects can impact
stock price efficiency. Second, our paper contributes to the corpo-
rate transparency literature by distinguishing the effect of exter-
nally-generated transparency (e.g. through press reporting) and
the effect of self-generated transparency (e.g. through financial
reporting) and showing that the two types of transparency do
not completely overlap in affecting stock price informativeness.
The rest of the paper is organized as follows. Section 2 discusses
the relevant background literature and develops our research
hypotheses. Section 3 describes the data and variables. Section 4
carries out the empirical analysis. Section 5 concludes the paper.
2. Background literature and hypothesis development
2.1. Corruption, fraud, and press freedom
The notion that corruption and fraud have detrimental eco-
nomic consequences has been a topic of academic debate for some
time (e.g. Rose-Ackerman, 1975). This notion is confirmed in a ser-
ies of cross-country studies.5 In particular, Mauro (1995) showed
that corruption adversely affects the rates of investment. Knack
and Keefer (1995) and Brunetti and Weder (1998) find that activities
of corruption and fraud misallocate economic resources and nega-
tively affect wealth accumulation.
The negative consequences of corruption and fraud activities
have led to academic interests in both internal and external mech-
anisms that can control these activities. The proposed mechanisms
include a free and independent press (an external mechanism) that
deters wrongdoing by press exposure and/or the threat of exposure
(Brunetti and Weder, 2003), a merit-based (rather than nepotistic)
5
See, for example, Bardhan (1997) for a survey of the literature.
recruitment and promotion process (Rauch and Evans, 2000)
within the government and firms (an internal mechanism) to dis-
courage the trading of ‘‘favors’’ between government officials and
firm insiders, a competitive public sector pay for civil servants
(an internal mechanism) to reduce the incentive to accept bribes
(Van Rijckeghem and Weder, 2001). In particular, Brunetti and
Weder (2003) test the proposition that a press is an effective exter-
nal mechanism to control corruption and fraud activities and find
evidence of a significant relation between more press freedom
and less corruption in their large-sample cross-country study.
2.2. Press freedom as a measure of externally-generated transparency
Since the press is not a law or regulatory enforcement agency,
the power of the press lies in its ability as an external watchdog
to report or threaten to report wrongdoing. Extant studies support
the notion that the press can reduce corruption and fraud in gen-
eral because of its watchdog function.6 Thus, one interpretation of
the findings by Brunetti and Weder (2003) is that: (1) a free press
as a more effective external watchdog is able to produce more exter-
nally-generated transparency than a press subject to state interfer-
ence; and (2) the lack of press freedom in a country compromises
the ability of the press to produce this type of transparency.7 In other
words, the freedom of the press in a country measures its relative
ability to produce externally-generated transparency.
2.3. Press freedom, externally-generated transparency, and stock price
informativness
Recent studies in the finance and accounting literature have
shown that self-generated transparency through firm-level self-
disclosure improves the ability of stock prices to incorporate
firm-specific information as measured by stock price synchronicity
(Jin and Myers, 2006; Hutton et al., 2009; Kim and Shi, 2012; Jiang
et al., 2013). The underlying explanation for this result has to do
with the two effects of transparency. One is that transparency
makes firms more informative and thus enables stock prices to
incorporate more firm-specific information (i.e. the information
effect). The other is that transparency enhances investor protection,
which encourages more outside and/or perspective investors to
collect private firm-specific information before they trade and thus
enables stock prices to incorporate more firm-specific information
(i.e. the investor protection effect).
However, it is not known whether externally-generated trans-
parency, as measured by press freedom, is a significant factor
affecting the ability of stock price to inform. We hypothesize that
if self-generated transparency by self-disclosure (through quality
financial reporting) cannot duplicate externally-generated trans-
parency in producing the information effect and investor protection
effect, then press freedom is an important factor explaining the
ability of stock prices to incorporate firm-specific information.
We argue that self-generated transparency and externally-gener-
ated transparency cannot completely overlap because it is unlikely
that firms are willing to reveal corruption, fraud, or any dubious
activities that they engage in through self-disclosure. On the con-
trary, they are likely to cover up these activities. The inherent lack
6
Miller (2006), for example, finds that press coverage plays a role of facilitating
regulatory enforcement through the early exposure of accounting fraud in U.S. firms.
Dyck et al. (2008) show that coverage from the Anglo-American press, coupled with a
firm’s reputation concerns, increases the probability that corporate governance abuse
is reversed in Russian firms. Dyck et al. (2010) provide further evidence that the press
is responsible for ‘‘blowing the whistle’’ on 17–24% of all corporate frauds in the
United States between 1996 and 2004.
7
Externally-generated transparency by the press (e.g. through investigative and
critical reporting) contrasts with self-generated transparency by individual firms (e.g.
through better financial reporting quality).
 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310
of self-generated transparency in these matters results in a trans-
parency ‘‘gap’’ that can only be filled by external watchdog
mechanisms.
In other words, external watchdog mechanisms can enhance
both the information effect and the investor protection effect of
transparency. To the extent that a free press (a press subject to
state interference or control) is able (unable) to act as one such
external mechanism to generate transparency for firms, it will
improve (compromise) the ability of stock prices to incorporate
firm-specific information. We therefore hypothesize in alternative
form:
H1. The freedom of the press in a country is positively associated
with the ability of stock prices to incorporate firm-specific
information as captured by the inverse of stock price synchronicity,
all else being equal.
H2. The freedom of the press is positively associated with the abil-
ity of stock prices to predict future earnings as captured by the
future earnings incremental explanatory power (FINC), all else
being equal.
3. Data and variables
3.1. Empirical measures of press freedom
We use two measures to proxy for press freedom in a country.
The first measure, PressFreedom_general, is the first principal com-
ponent extracted from five indices using principal component
analysis (PCA) and normalized with a larger score implying less
press freedom. These five indices are: (1) the press freedom index
constructed by Freedom House, (2) the press freedom index con-
structed by Reporters Without Borders, (3) the number of journal-
ists held in jail as reported by Reporter Without Borders, (4) the
number of journalists killed as collected by Reporter Without Bor-
ders, and (5) the number of internet users held in jail as reported
by Reporter Without Borders. The second measure, PressFree-
dom_ownership, indicates the extent of state ownership of the
press in a country based on the method proposed by Djankov
et al. (2003). 8 A larger PressFreedom_ownership indicates less press
freedom. It is noted that our two measures of press freedom capture
different dimensions of state interference of the press. Whereas
8
To obtain the data, we first identify the names of the 10 largest daily newspapers
(excluding entertainment and sports dailies) by circulation in a country as well as the
names of their respective publishing firms from World Press Trends. World Press
Trends is published annually by the World Association of Newspapers for each
country during the period 2005–2010, covering the newspaper circulation informa-
tion of the country for the period 2004–2009. We then manually search for the
identity of the ultimate owner (i.e., state or private) for each newspaper in each
country. To do this, we rely on annual reports provided by Worldscope, where
available, and business reports in LexisNexis and the Financial Times databases and
Internet information sources. Specifically, we follow the methodology used by La
Porta et al. (1999) and Djankov et al. (2003) by focusing explicitly on the voting rights
rather than the cash flow rights in each firm. For each newspaper publishing firm in a
year, we identify the legal entities who own significant stakes; this provides the first
level of ownership. For each legal entity, we then identify its ownership structure by
identifying all significant vote holders, that is, the second level of ownership. We
continue this process at each level of ownership until it is no longer possible to break
down the ownership any further. The entity (state or private) that ultimately controls
the highest number of voting rights but no less than 20% of them at every level of
ownership is considered to be the controlling owner. (For example, an individual X is
said to control newspaper Z when he or she holds over 20% of voting rights in Firm Y,
which in turn owns over 20% of voting rights in Z.) After we ascertain the ownership
(state or private) of the 10 largest newspapers in a country for a given year, we count
the number of newspapers out of these 10 in a country for a given year that are state
owned and calculate their percentage. (For example, if three out of the 10 largest daily
newspapers in Country A are state owned, the state ownership of the media is 30% for
Country A.)
301
PressFreedom_general is a general measure of state interference by
executive and administrative means, PressFreedom_ownership is spe-
cific measure of state control of the press through ownership.
3.2. Empirical measures of self-generated transparency
To control for the fact that firms often produce a varying level of
self-generated transparency through internal governance mecha-
nisms, we include three measures of firm-level self-generated
transparency in our analysis. These measures are: (1) whether a
firm uses Big-6 auditors (Big6), (2) the extent of a firm’s accruals
earnings management (Accrual Quality), and (3) the extent of earn-
ings forecast disagreement among analysts measured by the stan-
dard deviation of analysts’ forecasts over the seven-month horizon
before the fiscal year-end (Analyst Dispersion). Given that self-
generated transparency is shown to improve stock price informa-
tiveness (e.g., Hutton et al., 2009; Kim and Shi, 2012), we wish to
isolate the impact of self-generated transparency from that of
externally-generated transparency as measured by press freedom.
3.3. Empirical measures of stock price informativeness
We measure stock price informativeness in two different ways.
First, we measure the extent to which the price of a stock is able to
incorporate firm-specific information using the inverse of stock
price synchronicity developed by Morck et al. (2000). Given the
cross-country nature of our study, we use two different measures
of stock price synchronicity, that is, stock price synchronicity mea-
sured at (1) the firm-level (SYNCH_F) and (2) the country level
(SYNCH_EW and SYNCH_VW).
To calculate firm-level stock price synchronicity, SYNCH_F, for
each firm in our sample, a firm is included in our sample only if
its stock is traded for at least 100 days in a given year. To alleviate
concern about potential outliers, we exclude extreme observations
whose absolute value of actual daily return exceeds 25%. The var-
iable SYNCH_F is defined as the natural logarithmic transformation
of the R2 of the world market model, computed as Ln[R2/(1  R2)],
where R2 is as defined in Eq. (A1) of Table A1.
Stock price synchronicity at the country level is calculated as (1)
SYNCH_EW, which is the simple, equally weighted average of
SYNCH_F of all stocks in a given year of a country in our sample,
and (2) SYNCH_VW, which is a value-weighted average of SYNCH_F
of all stocks of a country in a given year weighted by each stock’s
variance. We exclude countries with fewer than 25 stocks when
calculating SYNCH_EW and SYNCH_VW.
Second, we use an alternative measure to proxy for stock price
informativeness. Specifically, following Durnev et al. (2003) and
Ferreira and Laux (2007), we use future earnings incremental
explanatory power (FINC) as an alternative measure of stock price
informativeness for a robustness check. The variable FINC is
defined as the difference in the R2 values of the regression in
Eq. (A2) and those of the regression in Eq. (A3) in Table A1. The
term FINC is estimated for each country. The idea behind FINC is
that if the price of a stock contains more firm-specific information,
its return (i.e., change in price) should contain not only current
firm-specific earnings information but also future firm-specific
earnings information. At the country level, a higher FINC (i.e., a
higher difference in R2) indicates more informative stock prices,
in that stock prices contain more information about a firm’s future
earnings.
3.4. Country-level controls
To control for country-level differences, we construct three
indices and include them in our analysis: Financial Development
Index, Economic Development Index, and Legal/political Development
302 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310
Index. We use PCA to construct these three indices based on 20
country-level indices (see Table A2 for details and sources of these
indices). The Financial Development Index is the first principal com-
ponent extracted from 4 yearly sub-indices and normalized with a
larger score implying better financial development in a country.
These 4 sub-indices are: (1) ratio of stock market capitalization
to GDP, (2) ratio of the number of listed firms to population, (3)
ratio of the total value of traded shares in the stock market to
the GDP, and (4) ratio of the total value of traded shares in the
stock market to stock market capitalization. The Economic Develop-
ment Index is the first principal component extracted from 7 yearly
sub-indices and normalized in such a way that a larger score indi-
cates better economic development. These 7 sub-indexes are: (1)
GDP per capital, (2) ratio of total tax revenue to GDP, (3) the human
development index, (4) the economic freedom index, (5) the state-
owned enterprise index, (6) the state-owned bank index and (7)
the cost of starting new business index. The Legal/political Develop-
ment Index is the first principal component extracted from 9 sub-
indices and normalized with a larger score implying better legal/
political development. These 9 sub-indexes are: (1) legal origin;
(2) the autocracy index, (3) the judicial efficiency index, (4) the
patent protection index, (5) the corruption index, (6) the state
expropriation risk index, (7) the revised anti-director index, (8)
the anti-self-dealing index, and (9) the public enforcement index.
With the exception of legal origin, all are yearly indices.
3.5. Other control variables
Table A1 provides exact definitions and sources of the key vari-
ables above and the other control variables in the paper. The finan-
cial information needed to construct firm-level variables is
collected from Compustat.
4. Empirical analysis
4.1. Descriptive statistics
Our sample covers 45,220 firm-years in 50 countries/regions
over the period 2004–2009 (Table 1). Out of 50 sample countries,
43 countries/regions have information available for the full period
of 2004–2009. The remaining 7 have information available for less
than the full period. Table 2 provides descriptive statistics for firm-
level and country-level variables. At the firm level, the mean firm-
level stock price synchronicity (SYNCH_F) is 1.321 and its median
is 1.240. At the country level, the mean equally weighted (value-
weighted) stock price synchronicity, SYNCH_EW (SYNCH_VW), is
1.358 (1.531). The average PressFreedom_general score is
0.014 whereas the average PressFreedom_ownership is 0.086.
Most variables have fairly large standard deviations relative to
their mean values, suggesting that the variables are reasonably
distributed.
Table 3 shows the coefficients of Pearson pairwise correlations
among the country-level and firm-level variables, respectively.
With respect to the correlation statistics, the following are note-
worthy. First, our measures of stock price synchronicity are posi-
tively and significantly correlated with both measures of (the
lack of) press freedom. Though only suggestive of the underlying
relation, the results are in line with H1. Second, FINC is negatively
correlated with our measures of (the lack of) press freedom
although the correlations are not significant. Third, we find that
the synchronicity measures are negatively and significantly corre-
lated with all three country-level development indices, indicating
that stock price synchronicity is lower in more developed coun-
tries/regions. Fourth, our firm-level synchronicity measure is neg-
atively and significantly correlated with Big 6 and positively
correlated with Accrual Quality and Forecast Dispersion, suggesting
that firms with higher self-generated transparency tend to have
lower stock price synchronicity, as expected.
4.2. The impact of press freedom on stock price informativeness
Our hypotheses, H1 and H2, are concerned with the impact of
press freedom, as a measure of externally-generated transparency,
on the ability of stock prices to inform. To test H1 and H2, we spec-
ify the following regression:
X
StocPriceInform ¼ a0 þ a1 PressFreedom þ ak Controlk þ ðerrorÞ
k
ð1Þ
In this model, the dependent variable, StocPriceInform, refers to the
ability of stock prices to incorporate firm-specific information, or
stock price informativeness, which is the inverse measure of stock
price synchronicity. Press Freedom measures the extent of press
freedom in a country using two alternative proxies: PressFree-
dom_general and PressFreedom_ownership.
We first test H1, using firm-level synchronicity, SYNCH_F, as a
proxy for StocPriceInform. As hypothesized in H1, we expect to
observe a positive relation between SYNCH_F and our measures
of the lack of press freedom. We also test H1 using our measures
of country-level synchronicity, that is, SYNCH_EW and SYNCH_VW,
as proxies for StocPriceInform. A positive relation between these
country-level synchronicity measures and the lack of press free-
dom measures is consistent with H1. In Eq. (1), H1 translates as
a1 > 0 when Eq. (1) is estimated with StocPriceInform = SYNCH_F
(or SYNCH_EW or SYNCH_VW).
We test H2 using FINC as a proxy for StocPriceInform. As hypoth-
esized in H2, we expect to observe a negative relation between
FINC and the lack of press freedom. H2 translates as a1 < 0 when
Eq. (1) is estimated with StocPriceInform = FINC.
To control for self-generated transparency, we include Big 6
(whether a firm uses a big-6 auditor), Accrual Quality (the extent
of earnings management), and Forecast Dispersion (the extent of
earnings forecast disagreement among analysts) in the above
regression model.
Following previous related international studies (e.g., Jin and
Myers, 2006; Kim and Shi, 2012), we include a set of control vari-
ables that are deemed to affect stock price informativeness in the
market. We include the following firm-level control variables: size
(SIZE), leverage (LEV), performance (ROE), market-to-book ratio
(MB), return volatility (STD), Skewness, and Kurtosis. We also
include into the model the three country-level development vari-
ables, that is, Economic Development Index, Financial Development
Index, and Legal/political Development Index as well as the number
of stocks traded in a country’s stock market (Stock Number). Year
and industry dummies are also included to account for year and
industry fixed effects, respectively.
Panel A of Table 4 reports the results of regressing firm-level
synchronicity (SYNCH_F) on press freedom. As shown in Panel A,
we find that the coefficients of both PressFreedom_general and
PressFreedom_ownership are highly significant, with an expected
positive sign, both with and without the inclusion of self-generated
transparency measures of Big6, Forecast Dispersion, and Accrual
Quality. These results suggest that after adjusted for self-generated
transparency, externally-generated transparency remains posi-
tively associated with stock price informativeness. In other words,
externally generated transparency is able to enhance the informa-
tion effect and the investor protection effect of transparency. This
finding is consistent with H1. It is worth noting that the self-
generated transparency measures are generally significant and
with the expected sign when included into the model, confirming
 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310 303

Table 1
Sample distributions.

Country Time period Years in sample Observations in sample PressFreedom_ownership PressFreedom_general

Argentina 2004–2009 6 87 0.000 0.007
Australia 2004–2009 6 1291 0.000 0.489
Austria 2004–2009 6 124 0.000 0.538
Belgium 2004–2009 6 299 0.000 0.666
Brazil 2004–2009 6 109 0.000 0.007
Canada 2004–2009 6 708 0.000 0.568
Switzerland 2004–2009 6 614 0.000 0.678
Chile 2004–2009 6 108 0.139 0.330
China 2004–2009 6 1937 1.000 5.744
Germany 2004–2009 6 1155 0.000 0.589
Denmark 2004–2009 6 296 0.000 0.696
Egypt 2004–2009 6 35 0.683 0.681
Spain 2004–2009 6 308 0.000 0.428
Finland 2004–2009 6 451 0.000 0.727
France 2004–2009 6 1329 0.000 0.468
United Kingdom 2004–2009 6 2532 0.000 0.532
Greece 2004–2009 6 280 0.000 0.393
Hong Kong, China 2004–2009 6 863 0.033 0.792
Croatia 2006–2009 4 44 0.222 0.171
Hungary 2005–2009 5 62 0.000 0.520
Indonesia 2004–2009 6 188 0.083 0.339
India 2004–2009 6 887 0.000 0.272
Ireland 2004–2009 6 164 0.000 0.652
Israel 2006–2009 4 100 0.000 0.291
Italy 2004–2009 6 558 0.000 0.299
Jordan 2004–2009 6 42 0.548 0.433
Japan 2004–2009 6 9748 0.000 0.465
Kenya 2007–2009 3 35 0.171 0.225
South Korea 2004–2009 6 1064 0.000 0.321
Sri Lanka 2004–2009 6 25 0.367 1.046
Luxembourg 2006–2009 4 50 0.000 0.682
Morocco 2005–2009 5 52 0.333 0.445
Mexico 2004–2009 6 182 0.000 0.777
Malaysia 2004–2009 6 888 0.100 0.531
Nigeria 2004–2009 6 32 0.204 0.431
Netherlands 2004–2009 6 392 0.000 0.675
Norway 2004–2009 6 441 0.000 0.716
New Zealand 2004–2009 6 165 0.000 0.646
Pakistan 2004–2009 6 46 0.000 1.242
Peru 2006–2009 4 33 0.000 0.136
Philippines 2004–2009 6 184 0.033 0.759
Poland 2004–2009 6 175 0.122 0.396
Portugal 2004–2009 6 110 0.000 0.601
Singapore 2004–2009 6 474 0.000 0.778
Sweden 2004–2009 6 665 0.000 0.696
Thailand 2004–2009 6 869 0.104 0.375
Turkey 2004–2009 6 160 0.000 0.264
Taiwan, China 2004–2009 6 962 0.000 0.411
USA 2004–2009 6 13,458 0.000 0.481
South Africa 2004–2009 6 439 0.000 0.364
Total – 289 45,220 – –

This table reports the distribution of sample used in this study, which consists of 45,220 firm-year observation for 12,391 unique firms across 50 countries from 2004 to 2009.
Only firms those end their fiscal year in December are included in this sample to keep the firm-level data in parallel with country-level data. Utilities (SIC code: 4900-4949)
and finance (SIC code: 6000-6999) sectors are excluded from this sample. Please see the Appendix A for the definitions of PressFreedom_ownership and PressFreedom_general.

the previous findings that self-generated transparency reduces
stock price informativeness. The statistical significance of both
externally-generated and self-generated transparency measures
indicates both types of transparency are important and should be
included.
Panel B of Table 4 reports the results of the same regression in
Panel A but using our two alternative measures of country-level
synchronicity (i.e. SYNCH_EW and SYNCH_VW). Similar to the
results in Panel A, we also find that the coefficients of both Press-
Freedom_general and PressFreedom_owenrship are highly significant
with an expected positive sign, irrespective of whether our syn-
chronicity measure is equally weighted or value weighted. The
above findings lend further support to H1, suggesting that the lack
of press freedom deters firm-specific information from being incor-
porated into stock prices.
Panel B of Table 4 also presents the results of the same regres-
sion model, using FINC as an alternative proxy for stock price infor-
mativeness (columns 5 and 6). As shown, we find that the
coefficient of PressFreedom_general (PressFreedom_ownership) is
negative and significant at the 5% (1%) level. The findings are con-
sistent with H2, suggesting that press freedom enhances the ability
of stock prices to contain information about future earnings.
With respect to the estimated coefficients of the control vari-
ables, the following is apparent. First, since the country-level con-
trol variables are in effect country-specific proxies for political,
economic, and financial developments, our results are adjusted
for country-specific developmental factors. Second, since Big6,
Forecast Dispersion, and Accrual Quality are included, our results
are also adjusted for self-generated transparency and indicate the
impact of externally-generated transparency. Third, firm-level
304 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310

Table 2
Descriptive statistics.

N Mean Std. dev. P25 Median P75

Panel A: Descriptive statistics for variables at firm-level
SYNCH_F 45,220 1.321 1.047 1.970 1.240 0.590
SIZE 45,220 6.341 1.759 5.111 6.261 7.467
LEV 45,220 0.169 0.161 0.028 0.131 0.265
ROE 45,220 0.068 0.170 0.000 0.024 0.165
MB 45,220 2.552 2.671 1.074 1.791 3.019
BIG6 45,220 0.364 0.481 0.000 0.000 1.000
Forecast dispersion 45,220 1.601 1.960 0.347 0.797 1.899
Accrual quality 45,220 0.063 0.053 0.027 0.045 0.079
STD 45,220 0.208 0.189 0.082 0.150 0.268
Skewness 45,220 0.179 0.932 0.166 0.222 0.609
Kurtosis 45,220 7.302 6.578 4.154 5.347 7.737
Panel B: Descriptive statistics for variables at country-level
SYNCH_EW 289 1.358 0.488 1.717 1.317 1.019
SYNCH_VW 289 1.531 0.561 1.954 1.497 1.143
FINC 167 0.802 0.126 0.740 0.819 0.886
PressFreedom_ownership 289 0.086 0.207 0.000 0.000 0.100
PressFreedom_general 289 0.014 1.007 0.570 0.355 0.334
4
Stock Number (10 ) 289 0.058 0.101 0.008 0.018 0.061
Local market volatility 289 0.239 0.167 0.136 0.203 0.294
Lock market kurtosis 289 5.796 1.393 4.967 5.592 6.552
Economic Development Index 289 0.045 0.960 0.602 0.155 0.919
Financial development index 289 0.032 0.998 0.684 0.226 0.552
Legal/Political Development Index 289 0.043 0.978 0.934 0.253 0.991

This table reports descriptive statistics of main variables used in this study. All firm-level continuous variables are winsorized at the 1% and 99% levels by year. All variables
are as defined in Table A1.

synchronicity is significantly higher for larger firms, firms with
higher leverage, a lower market-to-book ratio, lower skewness,
and lower kurtosis.
In summary, the results presented in Panels A and B of Table 4,
taken together, support H1 and H2. They suggest that (1) the
ability of stock prices to incorporate firm-specific information is
lower in countries with a lower level of press freedom and (2)
the ability of stock prices to predict future earnings is lower in
countries with a lower level of press freedom. These results can
be construed as international evidence that (1) the lack of press
freedom reduces stock price informativeness and thus the
functional efficiency of stock prices and (2) externally-generated
transparency and self-generated transparency are individually
significant and do not completely overlap in their impact on stock
price informatveness.
4.3. Endogeneity
Endogeneity-related problems are less of a concern in this study
for two reasons. First, stock price synchronicity at the country-level
is unlikely to be able influence the level of press freedom in a
country. Second, stock price synchronicity at the firm level is even
less likely to do so. However, since one cannot completely rule out
possible endogeneity, we conduct additional tests, as explained
below.
4.3.1. Country-level controls
To the extent that there are systematic differences in country-
level characteristics across countries and these cross-country
differences affect both our measures of press freedom and other
variables, the omission of these country-level variables can poten-
tially create endogeneity problems. To alleviate this concern, we
include a large number of non-press-related country-level variables
(based on 20 country-level indices) in our baseline regressions. As
seen from Table 4, the regression coefficients of our test variables
of interest are highly significant, even after controlling for these
country-level variables, suggesting that our reported results are
unlikely to be driven by omitted cross-country differences that
are correlated with the variables included in the regression model.
4.3.2. Propensity score matching
We also conduct a propensity score matching (PSM) analysis to
examine whether our reported results are driven by endogeneity
(e.g., Rosenbaum and Rubin, 1984). To do so, we construct a sub-
sample by matching firms from countries with low press freedom
with firms from countries with high press freedom. The matched
pairs are in theory identical except for the difference in PressFree-
dom_general (PressFreedom_ownership). Specifically, we carry out
three steps.
First, we classify firms as in countries with low press freedom
(coded as one, treatment firms) if they are from countries where
more than 50% of the press (measured by PressFreedom_owner-
ship) are owned by the state. Similarly, we classify firms as in
countries with high press freedom (coded as zero, control firms)
if they are from countries where none of the press is state owned.
Second, we use a probit model in which the likelihood of a firm
being in a low press freedom country (i.e., the propensity score)
is linked to firm-level and country-level controls used in the base-
line regressions. We run the probit model for the firms in the
sub-sample described and estimate the propensity to be in a
low press freedom country for each firm. Third, we use the
one-to-one nearest neighbor match to each treatment firm with
a control firm. We then test whether the difference in SYNCH_F
between treatment firms and control firms are, on average, posi-
tive and significant.
We carry the same steps to match firms from countries with
low PressFreedom_general with those from countries with high
PressFreedom_general. Here, the coding scheme is different in that
we classify firms as in low press freedom countries (coded as
one, the treatment group) if they are from countries where Press-
Freedom_general measures are in the 95th percentile of the sample
or above, and classify firms as in low media concentration coun-
tries (coded as zero, the control group) if they are from countries
where PressFreedom_general measures in the 20th percentile or
lower.
Table 5 shows the PSM results. As shown, the difference in pro-
pensity scores between the treatment firm and the PSM firms (the
controls) is on average small. However, the difference in SYNCH_F
between firms in countries with high PressFreedom_ownership
 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310 305

Table 3
Correlations.

1 2 3 4 5 6 7 8 9 10 11
Panel A: Correlations between firm-level variables (n = 45,220)
SYNCH_F 1 1.000
SIZE 2 0.437 1.000
(<0.001)
LEV 3 0.101 0.095 1.000
(<0.001) (<0.001)
ROE 4 0.070 0.317 0.007 1.000
(<0.001) (<0.001) (0.124)
MB 5 0.051 0.238 0.245 0.124 1.000
(<0.001) (<0.001) (<0.001) (<0.001)
BIG6 6 0.029 0.222 0.111 0.066 0.116 1.000
(<0.001) (<0.001) (<0.001) (<0.001) (<0.001)
Forecast dispersion 7 0.029 0.253 0.250 0.224 0.136 0.201 1.000
(<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001)
Accrual Quality 8 0.166 0.238 0.102 0.194 0.127 0.103 0.177 1.000
(<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001)
STD 9 0.061 0.278 0.111 0.301 0.013 0.089 0.250 0.286 1.000
(<0.001) (<0.001) (<0.001) (<0.001) (0.006) (<0.001) (<0.001) (<0.001)
Skewness 10 0.004 0.010 0.024 0.008 0.057 0.115 0.032 0.004 0.056 1.000
(0.376) (0.035) (<0.001) (0.098) (<0.001) (<0.001) (<0.001) (0.353) (<0.001)
Kurtosis 11 0.152 0.068 0.034 0.063 0.028 0.204 0.102 0.035 0.087 0.219 1.000
(<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001)
Panel B: Correlations between country-level variables (n = 289)
SYNCH_EW 1 1.000
SYNCH_VW 2 0.960 1.000
(<0.001)
FINC 3 0.042 0.053 1.000
(0.590) (0.493)
PressFreedom_ownership 4 0.284 0.281 0.024 1.000
(<0.001) (<0.001) (0.761)
PressFreedom_general 5 0.403 0.374 0.060 0.645 1.000
(<0.001) (<0.001) (<0.441) (<0.001)
Stock Number 6 0.165 0.244 0.040 0.057 0.004 1.000
(0.005) (<0.001) (0.958) (0.338) (0.942)
Local market volatility 7 0.002 0.032 0.191 0.154 0.071 0.320 1.000
(0.974) (0.593) (0.014) (0.009) (0.230) (<0.001)
Lock market kurtosis 8 0.129 0.216 0.056 0.170 0.172 0.433 0.109 1.000
(0.028) (<0.001) (0.473) (0.004) (0.003) (<0.001) (0.065)
Economic Development Index 9 0.382 0.413 0.035 0.361 0.239 0.153 0.101 0.370 1.000
(<0.001) (<0.001) (0.655) (<0.001) (<0.001) (0.005) (0.087) (<0.001)
Financial Development Index 10 0.207 0.241 0.037 0.129 0.158 0.366 0.157 0.205 0.440 1.000
(<0.001) (<0.001) (0.629) (0.029) (0.007) (<0.001) (0.008) (<0.001) (<0.001)
Legal/Political Development Index 11 0.411 0.439 0.089 0.267 0.303 0.279 0.058 0.359 0.458 0.430 1.000
(<0.001) (<0.001) (0.256) (<0.001) (<0.001) (<0.001) (0.328) (<0.001) (<0.001) (<0.001)

This table reports the correlation coefficients between key variables at the firm-level (Panel A) and those at the country-level (Panel B), with the statistical significance levels
stated in parentheses. All firm-level continuous variables are winsorized at the 1% and 99% levels by year. All variables are as defined in Table A1.

and PressFreedom_general (treatment firms) and their PSM firms
(control firms) is, on average, large, positive, and significant at less
than the 5% level. In other words, the lack of press freedom has the
effect of reducing firm-level stock price synchronicity in an
approximated random setting. This evidence supports the view
that our reported regression results are unlikely to be driven by
potential endogeneity.
4.4. Additional analysis
The two empirical measures of press freedom used (PressFree-
dom_general and PressFreedom_ownership) in this study capture
different dimensions of press freedom: one focusing on the general
freedom from state interference, the other on the specific freedom
from state control through ownership. To examine their interactive
effects on stock price synchronicity, we estimate the following
regression:
StocPriceInform ¼ c0 þ c1 PressFreedom þ c2 PressOwnership
þ c3 PressFreedom  PressOwernship
X
þ ck Controlk þ ðerrorÞ
k different from the firm-level results in Panel A.
where Press Freedom and Press Ownership are proxied by PressFree-
dom_general and PressFreedom_owenrship, respectively. Stock price
informativeness, StocPriceInform, is proxied by firm-level synchro-
nicity (SYNCH_F), as well as country-level synchronicity measures
(SYNCH_EW and SYNCH_VW). We include the same set of control
variables as in Eq. (1). We expect to observe c3 > 0 to the extent that
the state ownership of the press exacerbates the synchronicity-
increasing effects arising from the lack of press freedom.
Panels A and B of Table 6 present the results of regression in Eq.
(2), using firm-level synchronicity (SYNCH_F) and country-level
synchronicity (SYNCH_EW and SYNCH_VW), respectively, as depen-
dent variables. First, we find that the coefficient of PressFree-
dom_ownership and the coefficient of PressFreedom_general are
positive and individually significant, suggesting that they capture
different dimension of press freedom as expected. Second, the
coefficient of the interaction term is positive and significant at
the 5% level, indicating that state ownership of the press exacer-
bates the effect of the lack of press freedom in increasing stock
price synchronicity. Moreover, as shown in Panel B, when the
country-level synchronicity measures (SYNCH_EW and SYNCH_VW)
ð2Þ are used as dependent variables, the results are not qualitatively
306 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310

Table 4
Press freedom and stock price informativeness.

Dependent variable: SYNCH_F

(1) (2) (3) (4)
Panel A: The effect of press freedom on firm-level synchronicity
PressFreedom_ownership 0.298*** 1.077***
(5.66) (3.40)
PressFreedom_general 0.058*** 0.062**
(3.59) (2.14)
SIZE 0.320*** 0.318*** 0.318*** 0.319***
(11.86) (13.83) (11.65) (14.35)
LEV 0.373*** 0.264*** 0.359*** 0.343***
(7.50) (8.87) (6.55) (7.62)
ROE 0.347* 0.073 0.378** 0.101
(1.90) (0.57) (2.22) (0.85)
MB 0.052*** 0.042*** 0.051*** 0.042***
(5.35) (7.03) (5.23) (6.45)
BIG6 0.231** 0.212**
(2.24) (2.14)
Forecast dispersion 0.019* 0.015
(1.88) (1.31)
Accrual quality 0.772** 0.899**
(2.04) (2.26)
STD 1.079*** 0.511*** 1.089*** 0.501***
(3.78) (5.48) (3.83) (4.22)
Skewness 0.040** 0.007 0.041** 0.008
(2.17) (1.09) (2.23) (0.98)
Kurtosis 0.019*** 0.019*** 0.019*** 0.019***
(9.96) (12.93) (9.83) (13.21)
Stock Number (104) 0.238*** 0.611 0.266** 0.426
(2.72) (1.48) (2.24) (1.29)
Economic Development Index 0.116** 0.213** 0.102* 0.147*
(2.44) (2.57) (1.81) (1.78)
Financial Development Index 0.038 0.034 0.056 0.024
(0.89) (0.68) (1.23) (0.74)
Legal/Political Development Index 0.230*** 0.152** 0.219*** 0.127**
(2.86) (2.58) (3.05) (2.03)
_cons 3.157*** 3.321*** 3.157*** 3.324***
(16.01) (19.71) (14.73) (21.21)
Industry dummies Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes
N 45,220 45,220 45,220 45,220
Adj. R2 0.41 0.43 0.41 0.43
Dependent variable: Dependent variable: Dependent variable: FINC
SYNCH_EW SYNCH_VW
(1) (2) (3) (4) (5) (6)
Panel B: The effect of press freedom on country-level synchronicity and future earnings incremental explanatory power
PressFreedom_ownership 0.337*** 0.338** 0.088***
(2.61) (2.45) (2.73)
PressFreedom_general 0.140*** 0.107*** 0.039**
(5.06) (3.73) (2.28)
Stock Number (104) 0.220*** 0.249*** 0.759*** 0.739*** 0.312 0.428
(2.98) (3.93) (2.61) (2.66) (1.14) (1.61)
Local market volatility 0.547*** 0.444*** 0.536*** 0.509*** 0.318*** 0.241***
(3.45) (2.91) (3.19) (3.20) (3.43) (3.55)
Local market kurtosis 0.020 0.020 0.004 0.007 0.013* 0.014*
(1.04) (1.05) (0.20) (0.36) (1.76) (1.73)
* **
Economic Development Index 0.091 0.073 0.134 0.099* 0.022* 0.022*
(1.82) (1.25) (2.53) (1.83) (1.76) (1.78)
Financial Development Index 0.025 0.017 0.026 0.042 0.006 0.009
(0.91) (0.64) (0.92) (1.47) (0.84) (0.96)
Legal/Political Development Index 0.100** 0.119** 0.084 0.116** 0.020 0.035*
(2.09) (2.58) (1.62) (2.35) (1.07) (1.68)
_cons 1.611*** 1.593*** 1.714*** 1.712*** 0.683*** 0.814***
(12.57) (12.83) (12.61) (13.37) (12.70) (12.29)
Year dummies Yes Yes Yes Yes Yes Yes
N 289 289 289 289 167 167
Adj. R2 0.43 0.47 0.42 0.48 0.15 0.19

This table presents the results of regressing stock price informativeness on press freedom measures. Stock price informativeness is measured by synchronicity at the firm-
level (SYNCH_F) in Panel A, and measured by equal-weighted synchronicity (SYNCH_EW), value-weighted synchronicity (SYNCH_VW) and the future earnings incremental
explanatory power (FINC) at the country-level in Panel B. t-values in parentheses are calculated based on robust standard errors that are clustered by country and year in
Panel A and by year in Panel B.
All variables are as defined in Table A1.
*
Denote statistical significance at the 10% levels, respectively.
**
Denote statistical significance at the 5% levels, respectively.
***
Denote statistical significance at the 1% levels, respectively.
 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310 307

Table 5
Propensity score matching estimations.

PressFreedom_ownership PressFreedom_general
Panel A: Results of propensity score prediction
SIZE 0.437* 0.148
(1.79) (1.55)
LEV 1.396 4.350***
(0.61) (3.60)
ROE 23.693*** 2.459**
(5.29) (2.40)
MB 0.031 0.137
(0.27) (1.58)
BIG6 3.620 3.937***
(1.56) (7.03)
Forecast dispersion 0.683*** 0.283***
(3.22) (4.35)
Accrual quality 5.478 5.950**
(0.93) (2.02)
STD 2.259 3.811***
(0.59) (2.61)
Skewness 0.564 0.660***
(1.48) (3.08)
Kurtosis 0.006 0.192***
(0.10) (4.80)
Stock Number (104) 146.532*** 23.521*
(8.46) (1.89)
Economic Development Index 14.455*** 23.596***
(9.62) (11.91)
Financial Development Index 5.316 3.539
(0.79) (1.16)
Legal/Political Development Index 35.059*** 2.332***
(9.85) (4.10)
_cons 61.021*** 2.304
(9.82) (0.20)
Industry dummies Yes Yes
Year dummies Yes Yes
N 41,757 11,305
Pseudo R2 0.29 0.21

Panel B: PSM results

I. Propensity score
Average of treatment firms 0.931 0.715
Treatment firms minus control firms 0.220 0.276
Number of pairs 1978 2319
II. SYNCH_F
Average of treatment firms 0.235 0.379
Treatment firms minus control firms 2.001 2.408
T(P)-value for difference test 2.23(0.026)** 3.23(0.001)***

This table presents the results of propensity score matching (PSM) analysis. A firm is classified as in the treatment group (coded as one) if it is in a country whose
PressFreedom_ownership is larger than 50%, and as in the control group (coded as zero) if it is in a country whose PressFreedom_ownership is zero. Alternatively, a firm is
classified as in the treatment group if PressFreedom_general falls into top 5% percentile, and as in the control group (coded as zero) if it falls into bottom 20% percentile. Panel A
reports the regression results for estimating propensity score, and Panel B reports the PSM analysis results at firm-level.
The variables are as defined in Table A1.
*
Denote statistical significance at the 10% levels, respectively.
**
Denote statistical significance at the 5%, levels, respectively.
***
Denote statistical significance at the 1% levels, respectively.

Our results presented in Panels A and B of Table 6, taken
together, suggest that the synchronicity-increasing effect arising
from the lack of press freedom is more pronounced in countries
with high state ownership of the press than in countries with
low state ownership. Stated another way, state ownership of the
press exacerbates the effect of the lack of press freedom on deteri-
orating stock price informativeness.
5. Concluding remarks
This paper examines the impact of press freedom, as a mea-
sure of externally-generated transparency, on the ability of stock
prices to incorporate firm-specific information in a cross-country
setting. We find a significant relation between more press
freedom and lower stock price synchronicity, suggesting that
the lack of press freedom reduces the ability of stock prices to
incorporate and reflect firm-specific information. We also find
a significant relation between more press freedom and the abil-
ity of stock prices to predict future earnings (as measured by
FINC), similarly suggesting that lack of press freedom reduces
the amount of firm-specific information contained in stock
prices, thereby making stock prices less informative. These
results are robust to potential endogeneity and reverse causality.
Additionally, we find that the adverse effect of the lack of press
freedom on stock price informativeness is exacerbated in
countries with a greater extent of state-owned press. More
importantly, since the level of press freedom in a country
indicates the level of externally-generated transparency of its
firms, our results suggests that (1) externally-generated trans-
parency has an impact on stock price informativeness and (2)
self-generated transparency and externally-generated transpar-
ency do not completely overlap.
308 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310

Table 6
Interactions of press ownership and press freedom.

Dependent variable: SYNCH_F

Panel A: Interactions of media ownership and press freedom at firm-level
PressFreedom_ownership 1.780***
(2.80)
PressFreedom_general 1.262*
(1.73)
PressFreedom_ownership  PressFreedom_general 0.990**
(1.98)
SIZE 0.313***
(14.09)
LEV 0.284***
(9.96)
ROE 0.077
(0.67)
MB 0.040***
(6.82)
BIG6 0.211*
(1.84)
Forecast dispersion 0.011
(1.06)
Accrual quality 0.812**
(2.11)
STD 0.472***
(4.08)
Skewness 0.009
(1.36)
Kurtosis 0.019***
(12.87)
Stock Number (104) 0.523
(1.56)
Economic Development Index 0.185*
(1.65)
Financial Development Index 0.027
(0.72)
Legal/Political Development Index 0.248***
(2.85)
_cons 3.311***
(16.20)
Industry dummies Yes
Year dummies Yes
N 45,220
Adj. R2 0.44
Dependent variable: SYNCH_EW Dependent variable: SYNCH_VW
(1) (3)
Panel B: Interactions of media ownership and press freedom at country-level
PressFreedom_ownership 0.523* 0.695**
(1.76) (2.11)
PressFreedom_general 0.134 0.153*
(1.56) (1.71)
PressFreedom_ownership  PressFreedom_general 0.163* 0.130*
(1.72) (1.74)
Stock Number (104) 0.284 0.558
(1.01) (1.18)
Local market volatility 0.631*** 0.689*
(3.75) (1.77)
Local market kurtosis 0.018 0.061**
(0.86) (2.00)
Economic Development Index 0.028 0.098*
(1.41) (1.77)
Financial Development Index 0.047 0.081
(1.57) (1.27)
Legal/Political Development Index 0.250*** 0.203**
(3.96) (2.05)
_cons 1.157*** 1.091***
(8.82) (5.78)
Year dummies Yes Yes
N 289 289
Adj. R2 0.44 0.49

This table reports the interaction effects of press ownership and press freedom on stock price informativeness. Panel A presents the regression results at the firm-level and
Panel B the country-level regression results. T-values in parentheses are calculated based on robust standard errors that are clustered by country and year in Panel A and by
year in Panel B. The superscripts.
All variables are as defined in Appendix A.
*
Denote statistical significance at the 10% levels, respectively.
**
Denote statistical significance at the 5% levels, respectively.
***
Denote statistical significance at the 1% levels, respectively.
 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310 309

Table A1
Variable definitions.

Variable Definition Data source

Firm-level variables:
SYNCH_F Natural logarithmic transformation of the world market model used in Jin and Myers (2006) and defined in Eq. Compustat
(A1), computed as Log[R2/(1  R2)], where R2 is the R2 of the model:

ri;t ¼ a0 þ a1;i Rm;j;t1 þ a2;i ½RUS;t1 þ ej;t1  þ a3;i Rm;j;t þ a4;i ½RUS;t þ ej;t  þ a5;i Rm;j;tþ1 þ a6;i ½RUS;tþ1 þ ej;tþ1  þ wi;t ðA1Þ

where r is the return of stock i at day t in country j. Rm,j,t is the value-weighted local market return, and RUS,t is the
value-weighted US market return, and e is the exchange rate per U.S. dollar. The synchronicity of US firms is
calculated by setting a2,i, a4,i, and a6,i to zero
STD Standard deviation of a stock’s firm-specific daily return in year t, where the firm-specific daily return is defined as As above
the natural logarithmic transformation of one plus the residual return (wi,t) from Eq. (A1)
Skewness Skewness of the firm-specific daily return over year t As above
Kurtosis Kurtosis of the firm-specific daily return over year t As above
LEV Book value of liabilities scaled by total assets, measured at the beginning of year t As above
SIZE Log of the market value of equity at the beginning of year t As above
ROE The income before extraordinary items divided by the book value of equity, measured at the end of year t  1 As above
MB The market value of equity to the book value of equity, measure at the beginning of year t As above
BIG6 Equal to one if the firm’s audit service is supplied by PwC, Deloitte &Touche, Ernst &Young, KPMG, Grant Thornton, As above
or BDO Seidman and zero otherwise.
Accrual quality Standard deviation of the firm’s residuals from year t  4 to t taken from time-series cross-sectional estimations of As above
fitted values that regressing total current accruals on change in sales; property, plant, and equipment; and industry
and time dummies. See Chaney et al. (2011) for details
Forecast dispersion Standard deviation of analyst forecasts over the seven-month horizon before the fiscal year-end, deflated by stock I/B/E/S
price at the previous fiscal year-end and multiplied by 100. The timing differences between forecasts over this
horizon are adjusted by (1) regressing all forecasts against the length of time between them and the fiscal year-end
and (2) then taking the residual of each predicted forecast as the timing-adjusted forecast
Country-level variables:
SYNCH_EW Equally weighted average of SYNCH_F across all the stock for the year in the country. Countries with fewer than 25 Compustat
stocks are excluded from the sample.
SYNCH_VW Average SYNCH_F of stocks weighted by each stock’s variance of daily returns for the year in the country. Countries As above
that have fewer than 25 stocks are excluded from the sample
FINC The increase in R2 of the following regression in Eq. (A2) relative to that of the base regression in Eq. (A3): As above
X X
reti;t ¼ b0 þ b1 DEi;t þ hs DEi;tþs þ /s Dreti;tþs þ ti;t ðA2Þ

reti;t ¼ b0 þ b1 DEi;t þ ti;t ðA3Þ

where reti,t is the annual return for stock i, and DEi,t is the change in earnings per share (income before
extraordinary items over common shares outstanding) scaled by the stock price at the end of previous year. These
regressions are estimated for each country–year
Stock Number The number of stocks that are traded in the country’s stock market in year t As above
Local market volatility The average value of all stocks’ STD in the country’s stock market in year t As above
Local market kurtosis The average value of all stocks’ Kurtosis in the country’s stock market in year t As above
PressFreedom_ownership Percentage of state-owned newspapers out of the 10 largest daily newspapers by World Press Trends,
Company annual
reports, Internet
resource
PressFreedom_general The Press Freedom is the first principal component extracted from four yearly indices by executing principal Freedom House
component analysis yearly, and normalized with a larger score implying less press freedom. The four sub-indexes Reports without
include: (1) press freedom index constructed by Freedom House, (2) press freedom index constructed by Reports Borders
without Borders, (3) the number of journalists held in jail collected by Reports without Borders, (4) the number of
journalists killed collected by Reports without Borders, and (5) the number of internet users held in jail collected
by Reports without Borders. All are yearly and scaled to between zero and ten with a higher score implying a worse
level of press freedom
Financial Development The Financial Development Index is the first principal component extracted from four yearly indices by executing See Table A2
Index principal component analysis and normalized with a larger score implying better development. The four sub-
indexes include: (1) ratio of stock market capitalization to GDP, (2) ratio of the number of listed firms to
population, (3) ratio of the total value of traded shares in the stock market to the GDP, and (4) ratio of the total
value of traded shares in the stock market to stock market capitalization. All are yearly and scaled to between zero
and ten with a higher score implying a higher level of development
Economic Development The Economic Development Index is the first principal component extracted from seven indices by executing See Table A2
Index principal component analysis yearly, and normalized with a larger score implying better development. The seven
sub-indexes include: (1) the GDP per capital, (2) the ratio of total tax revenue to GDP, (3) the human development
index, (4) the economic freedom index, (5) the State-owned Enterprise index, (6) the State-owned Bank index and
(7) cost of starting new business index. All are yearly and scaled to between zero and ten with a higher score
implying a higher level of development
Legal/Political The legal/political development index is the first principal component extracted from nine indices by executing See Table A2
Development Index principal component analysis yearly, and normalized with a larger score implying better development. The nine
sub-indexes include: (1) legal origin, (2) autocracy index, (3) judicial efficiency index, (4) patent protection index,
(5) corruption index, (6) state expropriation risk index, (7) revised anti-director index, (8) anti-self-dealing index
and (9) public enforcement index. With the exception of legal origin, all are indices are yearly and scaled to
between zero and ten with a higher score implying a higher level of development
310 J.-B. Kim et al. / Journal of Banking & Finance 46 (2014) 299–310

Table A2
Factors and data sources used to construct financial development index, economic Development Index and Legal/Political Development Index.

Factors Data source

A. Financial Development Index
A1. Stock market capitalization/GDP World Bank World Development Indicators
A2. Number of listed firms/population World Bank World Development Indicators
A3. Total value of traded shares/GDP World Bank World Development Indicators
A4. Total value of traded shares/market capitalization World Bank World Development Indicators
B. Economic Development Index
B1. GDP per Capita World Bank World Development Indicators
B2. Tex revenue/GDP World Bank World Development Indicators
B3. Human development index United Nations Development Program: Human Development Report
B4. Economic openness index Heritage Foundation
B5. State-owned enterprises Economic Freedom of the World: 2011 Annual Report
B6. State ownership of banks Economic Freedom of the World: 2011 Annual Report
B7. Cost of starting a new business Economic Freedom of the World: 2011 Annual Report
C. Legal regime index
C1. Legal origin La Porta et al. (1998)
C2. Autocracy Polity IV
C3. Judicial efficiency Economic Freedom of the World: 2011 Annual Report
C4. Patent protection Economic Freedom of the World: 2011 Annual Report
C5 Corruption Transparency International
C6. State expropriation risk International Country Risk Guide
C7. Revised anti-director index Djankov et al. (2008)
C8. Anti-self-dealing index Djankov et al. (2008)
C9. Public enforcement index Djankov et al. (2008)

Acknowledgements
We wish to thank William Cready, Kaiwei Hui, Ramgopal
Venkataraman, and participants in the research seminars at the
City University of Hong Kong for comments and suggestions.
Jeong-Bon Kim acknowledges partial financial support for this
research obtained via a GRF grant of the Hong Kong SAR govern-
ment (Grant #: CityU144551). Hao Zhang acknowledges partial
financial support for this research obtained via a Strategic Research
Grant (Grant #: 7002886) from the City University of Hong Kong.
All errors are, of course, our own.
Appendix A
See Tables A1 and A2.
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