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 2022
• Subjects: cross-ownership; institutional investors; managerial learning; feedback effect of prices; Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/1999; https://ink.library.smu.edu.sg/context/soa_research/article/3026/viewcontent/SSRN_id3682404.pdf
• Institution: Singapore Management University

Theory suggests that stock price guides managers in corporate decisions as managers learn from price. We reason that cross-ownership lowers information processing costs and increases industry specialization, improving revelatory price efficiency (Bond, Edmans, and Goldstein 2012). Consistent with our expectations, we find that a firm’s investment-q sensitivity increases as its cross-ownership increases, suggesting that cross-ownership facilitates managerial learning from price and thus investment efficiency. We strengthen the causal inference by conducting a difference-in-differences analysis using financial institution mergers as an identification strategy. We also find that the increase in the investment-q sensitivity associated with cross-ownership is more pronounced for firms with a lower propensity of voluntary disclosure, for firms with managers of less private information, and for firms with higher stock liquidity. Overall, these results suggest that cross-ownership can induce more efficient corporate decisions by helping investors better produce private information and transmit it to stock price.