Internal capital markets and return predictability in complex ownership firms

• Main Authors: GONZALEZ, Angelica, SARKISSIAN, Sergei, TU, Jun, ZHANG, Ran
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Decision-making commonality; Earnings surprises; Investors’ inattention; Limits to arbitrage; Corporate Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6711; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7710/viewcontent/SSRN_id3559099.pdf
• Institution: Singapore Management University

Using global cross-ownership data, we find return predictability for four possible cases in ownership-linked firms (OLFs): subsidiary−parent, parent−subsidiary, subsidiary−subsidiary, and parent−parent. A long/short portfolio strategy sorted by the lagged monthly returns of OLFs yields the monthly Fama-French six-factor alpha of 79−113 bps. These results, which are observed only after the establishment of ownership links, are not subsumed by industry or cross-country momentums or by alternative inter-firm relations, including customer−supplier links, strategic alliances, common boards, and shared analyst coverage. The OLF return predictability is best explained by active internal capital markets—a mechanism unique to firms with a complex ownership network.