Corporate Financing of Investment Opportunities in a World of Institutional Cross-Ownership

64 Pages Posted: 8 Jun 2018 Last revised: 15 Jun 2020

See all articles by Yangyang Chen

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy

Qingyuan Li

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Chong Wang

The Hong Kong Polytechnic University

Date Written: June 2020

Abstract

Public firms are becoming increasingly interconnected through institutional investors’ stock ownership, specifically through cross-ownership, in which an institutional investor has a significant stake in multiple firms in the same industry. When a firm seeks external financing for its investment opportunities, information asymmetry arises between the firm and capital providers, which raises concerns about adverse selection pre-financing and moral hazard post-financing. Consistent with institutional cross-owners reducing such concerns, we find that cross-ownership facilitates the external financing of investment opportunities of these firms. We then examine conditions under which the role of cross-owners is likely to be greater in reducing adverse selection and moral hazard. We document that cross-ownership facilitates financing even more for firms in an opaque financial reporting environment, those facing more product market competition, and those with dedicated institutional cross-owners. We also provide supplementary evidence that cross-ownership is associated with a lower cost of capital and higher corporate investment. Our paper offers insight into the role of cross-ownership in reducing moral hazard and adverse selection from a corporate financing perspective.

Keywords: Cross-ownership; Information advantage; Investment opportunities; Corporate financing; Adverse selection; Moral hazard

JEL Classification: G10, G23, G32

Suggested Citation

Chen, Yangyang and Li, Qingyuan and Ng, Jeffrey and Wang, Chong, Corporate Financing of Investment Opportunities in a World of Institutional Cross-Ownership (June 2020). Available at SSRN: https://ssrn.com/abstract=3183581 or http://dx.doi.org/10.2139/ssrn.3183581

Yangyang Chen (Contact Author)

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Chong Wang

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

No contact information is available for Qingyuan Li

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