Institutional cross ownership of peer firms and investment sensitivity to stock price

• Main Authors: CHO, Young Jun, YANG, Holly I.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/1915
• Institution: Singapore Management University

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.