Firm Interlock and Stock Price Synchronicity: Evidence from the Tehran Stock Exchange

Abstract

Objective: Pyramidal ownership structures and cross-ownership are common phenomena in developing economies. These structures result in a divergence between voting rights and cash flow rights on the one hand, and create internal capital markets through which firms can raise capital internally instead of going to the public market when they need additional financing. In the present study, the effects of firm interlock and stock price synchronicity in Iran Stock Market was investigated. Methods: We used a unique data set containing stock ownership and directors of all companies listed on the Tehran Stock Exchange considering three definitions of management, stockholding, and ownership and examined interlock through both equity ties and interlocking directors. Results: We found that over 40 percent of all listed companies belong to networks of interconnected companies and there was a significantly positive relationship between being a member in each of these networks and the profitability of the firm alongside other colleagues. We also documented a complex set of networks among listed and unlisted companies, which have not been previously documented. We further find that pairwise interlocks through equity ties – either direct ownership or common owner – are correlated with higher stock price synchronicity, whereas common directorship is not linked to return co-movement. We can also claim that the effect is decreasing as firms become farther away from each other within a network. Conclusion: The results show that firm interlock, particularly through cross holdings and common ownership, can increase stock price synchronicity.

Keywords

• pyramidal ownership
• business groups
• joint control
• stock return co-movement