Connected Firms and Investor Myopia
56 Pages Posted: 5 Sep 2017
Date Written: September 1, 2017
Conglomerates, multinational corporations and business groups are non-exclusive forms of complex firms. Often organized as corporate networks, complex firms control a myriad of entities connected through ownership links. We investigate whether parent-subsidiary links within corporate networks lead to more transparency as investors receive more detailed information coming from different entities, or to more opacity when investors are unable to detect connections between the various corporate entities. We identify parent-subsidiary ownership structures where both parent and subsidiary are listed and examine share price reactions to information releases by various entities of the corporate network. We find that parent’s investors benefit from enhanced transparency when the parent announces its surprise earnings first, whereas subsidiaries’ investors seem mostly unaware of ownership links and are myopic.
Keywords: Ownership structures, corporate complexity, myopia surprise earnings announcements, business groups, conglomerates, inattention, post-earnings announcement drift, market frictions
JEL Classification: G14, G32
Suggested Citation: Suggested Citation