Internal capital markets and predictability in complex ownership firms

• Main Authors: CHANG, Ran, GONZALEZ, Angelica, SARKISSIAN, Sergei, Jun TU
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: Capital expenditures; Earnings surprises; Market inefficiency; Multinational enterprises; Ownership network; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7174; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8173/viewcontent/1_s2.0_S0929119922000621_main.pdf
• Institution: Singapore Management University

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.