Are Investors Aware of Ownership Connections?
48 Pages Posted: 29 May 2018
Date Written: May 25, 2018
We examine the market reactions to earnings announcements within a parent-subsidiary ownership structure. We find that the parents’ investors react to all announcements within the group either immediately or with delay, whereas subsidiaries’ investors only react to their own firm’s announcements, ignoring predictive information released by the parent. Multiple announcements within a group lead to enhanced transparency for parents’ investors, who benefit from detailed information on the origin of their firm’s earnings. In contrast, subsidiaries’ investors appear unaware of ownership links, and behave as inattentive investors. Inattention is worsened by geographical diversification of affiliated firms and by indirect ownership, but cannot be explained by strategic timing of the disclosure of earnings surprises, day-of-the-week effect or seasonality, internal capital markets, or synergy-related explanations across industries. Institutional investors do not seem to be smarter at understanding group structures, with the exception of active investors owning shares in both parent and subsidiary companies.
Keywords: Ownership structures, corporate complexity, inattention, unawareness, myopia, earnings announcements, business groups, conglomerates, inattention, post-earnings announcement drift, market frictions
JEL Classification: G14, G32
Suggested Citation: Suggested Citation