Internal Capital Markets and Predictability in Complex Ownership Firms

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

Chang, Ran and Gonzalez, Angelica and Sarkissian, Sergei and Tu, Jun, Internal Capital Markets and Predictability in Complex Ownership Firms (May 10, 2022). AFA 2019 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=3559099 or http://dx.doi.org/10.2139/ssrn.3559099