Common Ownership, Price Informativeness, and Corporate Investment

Abstract

Using financial institution mergers as exogenous shocks to common ownership, we find that stock prices of commonly held firms incorporate future earnings news more quickly and are less sensitive to noise traders. Our analyses show that the increase in price informativeness is due to: (1) increase in disclosure, (2) enhanced information production and diffusion, and (3) active trading by common owners. Further, we find that the investment sensitivity to Tobin’s Q for commonly held firms is higher, indicating that managers of such firms rely more on market prices for information. These results are robust to controlling for the financial crisis, and to alternative control groups. Our findings suggest that common ownership has a positive effect on information production and influences real corporate decision by improving price informativeness.

Keywords: Common Ownership, Market Efficiency, Investment, Information Acquisition

JEL Classification: G2, G14, G31