Internal Capital Markets and Return Predictability in Complex Ownership Firms

AFA 2019 Atlanta Meetings Paper

70 Pages Posted: 16 Apr 2020 Last revised: 21 Aug 2021

See all articles by Ran Chang

Ran Chang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Angelica Gonzalez

University of Edinburgh

Sergei Sarkissian

McGill University; University of Edinburgh

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Date Written: May 25, 2021

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 four types of ownership structures: subsidiary−parent, parent−subsidiary, subsidiary−subsidiary, and parent−parent. These results are observed only after the establishment of cross-firm ownership links and are not subsumed by focal firm or industry momentum, or alternative inter-firm relations, including customer−supplier links, strategic alliances, common boards, and shared analyst coverage. Our findings are best explained by mispricing due to an active internal capital market – a mechanism unique to complex ownership network firms.

Keywords: Capital expenditure, Cash-flow surprises, Earnings surprises, Investor inattention, Limits to arbitrage

JEL Classification: G15, G32, M41

Suggested Citation

Chang, Ran and Gonzalez, Angelica and Sarkissian, Sergei and Tu, Jun, Internal Capital Markets and Return Predictability in Complex Ownership Firms (May 25, 2021). AFA 2019 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=3559099 or http://dx.doi.org/10.2139/ssrn.3559099

Ran Chang (Contact Author)

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, 200030
China

Angelica Gonzalez

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Sergei Sarkissian

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada
514-398-4876 (Phone)
514-398-3876 (Fax)

HOME PAGE: http://sergei-sarkissian.com

University of Edinburgh

29 Buccleuch Pl.
Edinburgh, Scotland EH8 9JS
United Kingdom

Jun Tu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

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