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
Date Written: October 20, 2019
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: Suggested Citation