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Pairwise correlations of stock returns and ownership structure

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  • Münster, Markus
  • Walther, Martin

Abstract

Recent research suggests that competition is reduced by common ownership. Based on this idea, we build a model in which strategic investors have an incentive to reduce the correlation between companies they have invested in. Therefore, we hypothesize that pairwise correlations between stock returns decrease with increasing common strategic ownership. To test this hypothesis empirically, we construct a measure that captures the presence of strategic investors in both companies. Using NYSE data and several control variables, we find a negative relation between this measure and pairwise correlations. This result provides support for the anticompetitive effects of common ownership.

Suggested Citation

  • Münster, Markus & Walther, Martin, 2021. "Pairwise correlations of stock returns and ownership structure," Finance Research Letters, Elsevier, vol. 43(C).
    • Handle: RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321000982
    DOI: 10.1016/j.frl.2021.102017
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    References listed on IDEAS

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    1. José Azar & Martin C. Schmalz & Isabel Tecu, 2018. "Anticompetitive Effects of Common Ownership," Journal of Finance, American Finance Association, vol. 73(4), pages 1513-1565, August.
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    4. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    5. An, Heng & Zhang, Ting, 2013. "Stock price synchronicity, crash risk, and institutional investors," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 1-15.
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