Internal Capital Markets and Predictability in Complex Ownership Firms
AFA 2019 Atlanta Meetings Paper
65 Pages Posted: 16 Apr 2020 Last revised: 20 Jul 2022
Date Written: May 10, 2022
Using global cross-firm ownership data, we find that both stock returns and cash-flow news of ownership-linked firms predict focal firm’s returns for all types of ownership structures: subsidiary−parent, parent−subsidiary, subsidiary−subsidiary, and parent−parent. This effect, observed only after the establishment of cross-firm ownership, is not subsumed by focal firm or industry momentum, or alternative inter-firm relations, including customer−supplier links and shared analyst coverage. Our findings are explained by mispricing due to internal capital markets – a mechanism unique to complex ownership firms. Higher internal capital market activity among ownership-linked firms also induces larger investments and lower external financing of the focal firm.
Keywords: Capital expenditures, Earnings surprises, Market inefficiency, Multinational enterprises, Ownership network
JEL Classification: G15, G32, E43
Suggested Citation: Suggested Citation