Internal capital markets and predictability in complex ownership firms

Ran Chang, Angelica Gonzalez, Sergei Sarkissian*, Jun Tu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Using global cross-firm ownership data, we find that both stock returns and cash-flow news of ownership-linked firms predict focal firm’s returns for all types of ownership structures: subsidiary−parent, parent−subsidiary, subsidiary−subsidiary, and parent−parent. This effect, observed only after the establishment of cross-firm ownership, is not subsumed by focal firm or industry momentum, or alternative inter-firm relations, including customer−supplier links and shared analyst coverage. Our findings are explained by mispricing due to internal capital markets – a mechanism unique to complex ownership firms. Higher internal capital market activity among ownership-linked firms also induces larger investments and lower external financing of the focal firm.
Original languageEnglish
Article number102219
JournalJournal of Corporate Finance
Volume74
Early online date19 May 2022
DOIs
Publication statusPublished - Jun 2022

Keywords

  • decision-making commonality
  • earnings surprises
  • investors’ inattention
  • limits to arbitrage
  • capital expenditures
  • debt financing
  • equity financing
  • market inefficiency
  • multinational enterprises

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