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Common Owner Connections and Firms' Cross-Industry Information Frictions
Abstract
Managers face information acquisition and processing frictions that inhibit them from learning about investment opportunities in an industry different from their own (i.e., a foreign industry). I argue that common institutional investors that invest in a firm (i.e., a focal firm) and a foreign industry help mitigate such information frictions. Using a quasi-exogenous institutional merger and a difference-in-differences design, I find that after increasing common owner connections, a focal firm’s investments, cash flows, and investment opportunities become more positively correlated with those of a foreign industry, suggesting that common owners share private knowledge of opportunities in the foreign industry with a focal firm, which allows the focal firm to join foreign portfolio firms in capturing a new customer base. Additional analyses show that a strengthened common ownership connection predicts abnormal profits in a focal firm. Collectively, this study suggests that common owners reduce focal firm managers’ information frictions and expand firms’ investment opportunity sets that improve firms’ performance.
Citation
Zhao, Wanjia (2023). Common Owner Connections and Firms' Cross-Industry Information Frictions. Doctoral dissertation, Texas A&M University. Available electronically from https : / /hdl .handle .net /1969 .1 /199856.