Institutional Cross-Ownership of Peer Firms and Investment Sensitivity to Stock Price

46 Pages Posted: 17 Oct 2020

See all articles by Young Jun Cho

Young Jun Cho

Singapore Management University - School of Accountancy

Holly Yang

Singapore Management University - School of Accountancy

Date Written: July 17, 2020

Abstract

Theory suggests that stock price guides managers in corporate decisions as managers learn from price. We reason that cross-ownership of industry peers lowers information processing costs and increases industry specialization, helping investors better produce private information and transmit it to stock price. Cross-ownership can thus increase managerial learning from stock price in investment decisions. Consistent with our expectations, we find that a firm’s investment-q sensitivity increases as its cross-ownership in peer firms increases, in particular when information signals are not highly correlated between managers and outsiders. Moreover, we find that a pseudo measure of cross-ownership in non-peer firms is not positively but, rather, negatively associated with the investment-q sensitivity. We strengthen the causal inference by conducting a difference-in-differences analysis using the 2003 mutual fund scandal. Overall, our results suggest that cross-ownership in peer firms can induce more efficient corporate decisions by helping prices better reflect investors’ private information.

Keywords: cross-ownership, institutional investors, managerial learning, feedback effect of prices

JEL Classification: G10; G20; G23

Suggested Citation

Cho, Young Jun and Yang, Holly, Institutional Cross-Ownership of Peer Firms and Investment Sensitivity to Stock Price (July 17, 2020). Available at SSRN: https://ssrn.com/abstract=3682404 or http://dx.doi.org/10.2139/ssrn.3682404

Young Jun Cho

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

Holly Yang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://sites.google.com/site/holly0417phd/

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