Institutional cross ownership of peer firms and investment sensitivity to stock price
Theory suggests that stock price guides managers in corporate decisions as managers learn from price. We reason that cross-ownership of industry peers lowers information processing costs and increases industry specialization, helping investors better produce private information and transmit it to st...
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| Main Authors: | , |
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| Format: | text |
| Language: | English |
| Published: |
Institutional Knowledge at Singapore Management University
2020
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| Subjects: | |
| Online Access: | https://ink.library.smu.edu.sg/soa_research/1915 |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | Theory suggests that stock price guides managers in corporate decisions as managers learn from price. We reason that cross-ownership of industry peers lowers information processing costs and increases industry specialization, helping investors better produce private information and transmit it to stock price. Cross-ownership can thus increase managerial learning. Consistent with our expectations, we find that a firm’s investment-q sensitivity increases as its cross-ownership increases. We strengthen the causal inference by conducting a difference-in-differences analysis using the 2003 mutual fund scandal. Overall, our results suggest that cross-ownership can induce more efficient corporate decisions by helping prices better reflect investors’ private information. |
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