TY - JOUR
T1 - Internal capital markets and predictability in complex ownership firms
AU - Chang, Ran
AU - Gonzalez, Angelica
AU - Sarkissian, Sergei
AU - Tu, Jun
N1 - Funding Information:
We would like to thank Maria Boutchkova, Lauren Cohen, Amit Goyal, Bing Han, Gbenga Ibikunle, David McMillan, Ni Peng, Yilmaz Yildiz, Jianfeng Yu, Lu Zheng, and Guofu Zhou for their numerous suggestions, as well as acknowledge the feedback received from the participants of the 2019 American Finance Association, the 2018 European Financial Management Association, the 2018 Financial Management Association Doctoral Consortium, and the 2018 Multinational Finance Society meetings, as well as from the participants of seminars at Fudan University, Shanghai Jiao Tong University, Shenzhen Audencia Business School, Southern University of Science and Technology, Southwestern University of Finance and Economics, Sun Yat-sen University, University of Edinburgh, University of Science and Technology of China, University of Washington, and Xiamen University. Chang acknowledges financial support from the Shanghai Institute of International Finance and Economics and the Shanghai Pujiang Program. Sarkissian acknowledges financial support from the Social Sciences and Humanities Research Council (SSHRC). Tu acknowledges financial support from the Sim Kee Boon Institute for Financial Economics. An earlier version of this paper was circulated as “Ownership Links and Return Predictability”
Publisher Copyright:
© 2022
PY - 2022/6
Y1 - 2022/6
N2 - 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.
AB - 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.
KW - decision-making commonality
KW - earnings surprises
KW - investors’ inattention
KW - limits to arbitrage
KW - capital expenditures
KW - debt financing
KW - equity financing
KW - market inefficiency
KW - multinational enterprises
U2 - 10.1016/j.jcorpfin.2022.102219
DO - 10.1016/j.jcorpfin.2022.102219
M3 - Article
SN - 0929-1199
VL - 74
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
M1 - 102219
ER -