Private Subsidiaries’ Information Disclosure and the Cross-Sectional Equity Returns of Public Parent Firms

Abstract

We investigate the impact of potential information hiding originated from private subsidiaries on the future returns of their public parent firms. We find a significantly positive link between private subsidiaries' information disclosure (PSID) and the cross-section of future equity returns of public parent firms. The economically and statistically significant PSID premium of 0.60% per month is not explained by established factor models and is stronger for stocks that receive less investor attention and that are costlier to arbitrage. Consistent with investor underreaction hypothesis, PSID premium reflects slow diffusion of firm information into stock prices rather than compensation for risk.

Keywords: Private subsidiaries; public parent firms; limited attention; limits to arbitrage; return predictability.

JEL Classification: G10, G11, G12, G14