Common Ownership, Common Information Environment?

Abstract

We examine the influence of common ownership on commonalities in the information environment. Specifically, we study commonalities in financial statements and in the actions of key agents such as financial analysts and firm managers who contribute and respond to the information environment. Using a differences-in-differences research design centered on the mergers of financial institutions, we find that an increase in common ownership leads to increased comparability of financial statements issued by commonly owned firms. An increase in common ownership also leads to higher likelihood of filing restatements, as greater comparability and potentially greater correlation of economic fundamentals uncover inconsistencies, errors and irregularities in reporting, particularly in the presence of shared auditors. In addition, common ownership leads to more shared coverage by financial analysts. Analysts’ earnings expectations become more correlated across peer firms, but analysts are also more likely to revise their expectations when peer firms issue earnings guidance. Finally, we shed light on the real consequences of such changes in the information environment. Managers become more likely to use the information captured in peer firms’ stock price when making investment decisions following an increase in common ownership.