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Internal capital markets and predictability in complex ownership firms

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  • Chang, Ran
  • Gonzalez, Angelica
  • Sarkissian, Sergei
  • Tu, Jun

Abstract

Using global cross-firm ownership data, we find that both stock returns and cash-flow news of ownership-linked firms predict focal firm's returns for all types of ownership structures: subsidiary−parent, parent−subsidiary, subsidiary−subsidiary, and parent−parent. This effect, observed only after the establishment of cross-firm ownership, is not subsumed by focal firm or industry momentum, or alternative inter-firm relations, including customer−supplier links and shared analyst coverage. Our findings are explained by mispricing due to internal capital markets – a mechanism unique to complex ownership firms. Higher internal capital market activity among ownership-linked firms also induces larger investments and lower external financing of the focal firm.

Suggested Citation

  • Chang, Ran & Gonzalez, Angelica & Sarkissian, Sergei & Tu, Jun, 2022. "Internal capital markets and predictability in complex ownership firms," Journal of Corporate Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:corfin:v:74:y:2022:i:c:s0929119922000621
    DOI: 10.1016/j.jcorpfin.2022.102219
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    Cited by:

    1. Xin Wang & Haofei Zhang, 2023. "The cross‐predictability of industry returns in international financial markets," International Review of Finance, International Review of Finance Ltd., vol. 23(4), pages 859-885, December.

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