Do foreigners facilitate information transmission in emerging markets

Using the degree of accessibility in emerging markets, or investibility, as a proxy to measure of the severity of the market frictions affecting a stock in local markets, we assess whether investibility has a significant influence on the cross-autocorrelations of stocks in emerging markets, and whether this is due to the slow diffusion of common information across stocks. We show that returns of portfolios of highly-investable firms lead returns of portfolios of non-investable firms, but not vice versa. Moreover, this lead-lag effect is not driven by other known determinants such as size, trading volume, or analyst coverage and is not a purely intra-industry phenomenon. These patterns arise because stock prices of highly-investable firms adjust faster to market-wide information. We confirm that greater investibility reduces the delay with which individual stock prices respond to the global and local market information. Our findings support the slow information diffusion hypothesis as a cause of the lead—lag effect in stock returns. The results also provide insights as to why financial liberalization in the form of greater investibility might yield more informationally efficient stock prices in emerging markets