Private Subsidiaries’ Information Disclosure: Does It Matter in the Cross-Section of Stock Returns?

52 Pages Posted: 18 Nov 2019 Last revised: 21 Nov 2019

See all articles by Zilin Chen

Zilin Chen

Singapore Management University - Lee Kong Chian School of Business

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Ran Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: October 20, 2019

Abstract

Public firms may choose to have private subsidiaries to hide bad news and/or proprietary information. We hypothesize that the private subsidiaries’ information disclosure (PSID) level reflects the degree of information hiding activities of their parental firm, and may be able to forecast the future performance of parental firm. Empirically, we find that the higher the PSID level, the larger the future returns of their public parent firms. A long-short value-weighted portfolio of public parent firms sorted on their PSID yields a significant Fama and French (2018) six-factor alpha of more than 50 bps per month. This PSID based abnormal return cannot be explained by a variety of risk factors, firm characteristics, and risk-based arguments.

Keywords: Information disclosure, Private subsidiaries, Public parent firms, Return predictability

JEL Classification: G11, G14

Suggested Citation

Chen, Zilin and Tu, Jun and Zhang, Ran, Private Subsidiaries’ Information Disclosure: Does It Matter in the Cross-Section of Stock Returns? (October 20, 2019). Available at SSRN: https://ssrn.com/abstract=3482349 or http://dx.doi.org/10.2139/ssrn.3482349

Zilin Chen

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore
Singapore

Jun Tu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

Ran Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, 200030
China

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