Institutional Cross-Ownership of Peer Firms and Revelatory Price Efficiency

Young Jun Cho and Holly Yang

♦ We argue that cross-ownership increases the private information embedded in stock prices, improving their feedback to managers. Consistent with this, we find that greater cross-ownership heightens a firm’s investment-q sensitivity, especially for firms with lower voluntary disclosure or managers with less private information. Additionally, cross-ownership reduces the sensitivity of a firm’s investment to peers’ stock prices and has a stronger impact when investors actively trade the firm’s shares. Using financial institution mergers for identification, we strengthen causal inference, suggesting that cross-ownership enhances revelatory price efficiency (RPE) and leads to more efficient corporate decisions.