Corporate Equity Ownership and Expected Stock Returns
49 Pages Posted: 20 Apr 2016
Date Written: April 18, 2016
We investigate the cross-sectional predictive relations between stock returns of two public firms with one firm, the parent, owning partial equity of the other, the subsidiary. We find that high past returns of the subsidiary (parent) predict high future returns of the parent (subsidiary). The subsidiary-to-parent predictability does not exist before the ownership is established, remains intact after controlling for a variety of stock characteristics, and is stronger among stocks with higher barriers to arbitrage and lower degree of investor attention. The parent-to-subsidiary predictability is, however, unlikely to be caused by corporate equity ownership, but by other forces such as the industry lead-lag effects.
Keywords: corporate equity ownership, stock returns, market efficiency, limits to arbitrage, investor attention
JEL Classification: G12, G14, G32, G34
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