Return Predictability in Firms with Complex Ownership Network

Abstract

In this study, using data from 23 developed markets, we examine all four possible cases of stock return predictability in ownership-linked firms (OLFs): parent-subsidiary, subsidiary-parent, subsidiary-subsidiary, and parent-parent. We find that the returns of OLFs predict returns of the focal firm for all four cases. In particular, a simple long/short portfolio strategy for firms sorted by the lagged monthly returns of OLFs yields the Fama and French (2018) value-weighted six-factor alpha of up to 113 bps per month. The underreaction of focal firms to OLF returns is best explained by active internal capital markets – a specific mechanism unique to OLFs.

Keywords: Cross-listing, Earnings surprises, Investors’ inattention, Limits to arbitrage, Ownership complexity

JEL Classification: G11, G14, G15