Common ownership, price informativeness, and corporate investment

Abstract

Using financial institution mergers as exogenous shocks to common ownership, we find that stock prices of commonly held firms incorporate future earnings news more efficiently and are less sensitive to noise traders. We identify two potential mechanisms: (1) information diffusion between connected firms, and (2) active trading by common owners. We find that the investment sensitivity to Tobin’s Q for commonly held firms is higher, indicating that managers of such firms rely more on market prices for information. Our findings suggest that common ownership has a positive effect on information production and influences real corporate decision by improving price informativeness.