Return Predictability in Firms with Complex Ownership Network
AFA 2019 Atlanta Meetings Paper
75 Pages Posted: 16 Apr 2020 Last revised: 1 Jun 2020
Date Written: May 30, 2020
In this study, using global cross-ownership data, we examine all four possible stock return predictability cases in ownership-linked firms (OLFs): parent-subsidiary, subsidiary-parent, subsidiary-subsidiary, and parent-parent. We find that OLF returns predict returns of focal firms in all four cases. A simple long/short portfolio strategy for firms sorted by the lagged monthly returns of OLFs yields the Fama-French six-factor alpha of 79-113 bps per month. These results are not subsumed by customer-supplier relations, or industry or cross-country return momentums. The return predictability in OLFs is best explained by active internal capital markets – a specific mechanism unique to firms with complex ownership.
Keywords: Cross-listing, Decision-making commonality, Earnings surprises, Investors’ inattention, Limits to arbitrage
JEL Classification: G11, G14, G15
Suggested Citation: Suggested Citation