The Information Advantage of Industry Common Blockholders and Its Stabilizing Effect on Stock Price Crash Risk

Abstract

Blockholding multiple firms within an industry generates an information advantage for institutional investors, who can better differentiate between the industry-wide and firm-specific nature of bad news released by peer firms and avoid selling on false spillover signals (i.e., “smart exit”). Empirically, we document that industry common ownership reduces future firm-level stock price crash risk, which is in sharp contrast with the positive effect of total institutional ownership on stock price crash risk. Our results are best explained by the attenuated spillover from industry peer firms’ firm-specific bad news, as opposed to the monitoring effect that reduces the focal firm’s hoarding of bad news. Our results suggest that the presence of industry common owners provides a stabilizing effect against stock price contagion.

Keywords: Institutional Investor; Blockholder; Common Ownership; Stock Price Crash Risk; Contagion

JEL Classification: G12, G14, G34, M41