Is institutional common ownership commonly priced? Insights from the cost of equity capital

Xiaoran Ni and David Yin

Journal of Banking & Finance, 2023, vol. 155, issue C

Abstract: This study examines the effect of institutional common ownership on a firm's cost of equity capital. Recent literature on common ownership yields opposing predictions: increased strategic alliance in the product market could increase the non-diversifiable covariance risk of a firm's cash flows with other firms, leading to a higher cost of equity capital. However, reduced product market risk that is in part non-diversifiable could lead to a lower cost of equity capital. In both baseline and difference-in-differences settings, we document a negative and significant relation between common ownership and the cost of equity capital. We also provide direct evidence that common ownership reduces product market predation risk, distress risk, and overall risk while increasing stock liquidity. We do not find sufficient evidence that improved corporate governance drives the main findings. Overall, our findings indicate that institutional common ownership offers benefits to individual firms by reducing the cost of equity financing.

Keywords: Common ownership; Cost of equity capital; Product market; Firm risk (search for similar items in EconPapers)
JEL-codes: G23 G32 G34 M41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:155:y:2023:i:c:s0378426623001887

DOI: 10.1016/j.jbankfin.2023.106990

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