2023 Common Institutional Ownership and Stock Price Crash Risk

Common Institutional Ownership and Stock Price Crash Risk
Shenglan Chen 1 | Hui Ma 2 | Qiang Wu 3 | Hao Zhang 4*
Contemporary Accounting Research, forthcoming
Abstract: This paper presents new evidence on the economic benefits arising from common
institutional ownership. We find a negative and significant effect of common institutional
ownership on stock price crash risk. This effect is robust to a battery of robustness checks and is
causal according to some identification tests, including difference-in-differences (DiD) analyses
on financial institution mergers. We find evidence that the negative effect is attributable to the
monitoring role of common institutional owners—a role that is enabled by common owners’ lower
information processing cost and greater monitoring incentives owing to governance externalities.
We also find that common owners negatively influence crash risk through constraining bad news
hoarding and that common owners are more likely to force chief executive officer (CEO) turnover
when a firm has higher crash risk. Overall, our results suggest that common institutional
shareholders play a unique and effective monitoring role that fends off stock price crashes.
Keywords: Common institutional ownership; Bad news hoarding; Overinvestment; Stock price
crash risk; Monitoring; Governance externalities
JEL Classification Code: G23; G32; M41
1
School of Economics and Institute for Industrial System Modernization, Zhejiang University of Technology, China
2
Institute of Accounting and Finance, Shanghai University of Finance and Economics, China
3
School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong
4
Saunders College of Business, Rochester Institute of Technology (RIT), USA
*
Acknowledgement: The paper benefitted greatly from valuable comments and suggestions of Linda A. Myers
(editor), Partha S. Mohanram (editor-in-chief), and two anonymous referees. We thank our colleagues at our respective
institutions for their comments. Shenglan Chen acknowledges financial support from the National Social Science Fund
later-funded project (22FJYB014). Hui Ma acknowledges financial support from the National Natural Science
Foundation of China (72102166), the MOE Project of Key Research Institute of Humanities and Social Science in
University (22JJD790094), and 111 Project (B18033). Qiang Wu acknowledges financial support from the start-up
fund at the Hong Kong Polytechnic University (1-BE52). Hao Zhang acknowledges financial support from the
Saunders College of Business at RIT.
0
Electronic copy available at: https://ssrn.com/abstract=3746777

1. Introduction
Common institutional ownership occurs when an institutional investor holds significant
equity stakes in multiple firms within the same industry. It has become an increasingly prevalent
phenomenon as institutional investors expand their dominance in the United States (U.S.) stock
markets. 5 It has also become one of the hottest antitrust topics because common ownership can
promote collusion in a product market and give rise to anticompetitive effects (Jackson 2018).
Although most studies on anticompetitive effects (e.g., Azar et al. 2018) demonstrate substantial
attendant costs of common ownership, some recent studies reveal its beneficial effects on firm
innovation (Anton et al. 2018) and earnings quality (Ramalingegowda et al. 2021). It is therefore
debatable whether common ownership should be strictly regulated (Posner et al. 2017).
Furthermore, prior studies focus predominantly on product market outcomes or firm policies, but
there is a surprising paucity of research on the beneficial capital market consequences of common
ownership. This study aims to contribute to the debate by examining the effect of common
institutional ownership on an important capital market outcome—stock price crash risk.
Crash risk, or the possibility that a stock’s price will suddenly and significantly fall, is an
important consideration for investors. In their seminal work, Jin and Myers (2006) and Hutton et
al. (2009) attribute the importance of crash risk primarily to investor concerns about extreme losses
that arise because they cannot effectively reduce this risk through diversification. Institutional
investors are even more concerned about this risk because they have greater difficulty unwinding
their positions due to price impact (Chiyachantana et al. 2004; Brunnermeier and Pedersen 2005)
and because they are sometimes forced to liquidate positions due to capital withdrawals (Shleifer
and Vishny 2011). A survey by Allianz Global Investors indicates that nearly two-thirds of the 735
5
For example, the proportion of U.S. public companies with common ownership has increased from less than 10%
in 1980 to approximately 60% in the mid 2010s (He and Huang 2017).
1

institutional investors surveyed state that tail-risk has become an increasing concern. 6 The fact
that institutional investors often file “stock-drop lawsuits” is a clear indication of their deep
concerns about stock price crashes. Thus, Jin and Myers (2006) and others conclude that firm
characteristics that contribute to the far-left tail of the return distribution warrant thorough
investigation. Although recent studies (e.g., Kim et al. 2011a; Hong et al. 2017; Bauer et al. 2021)
shed significant light on the determinants of stock price crash risk, limited attention has been
devoted to examining the role of common institutional owners in shaping crash risk. Our study
extends the prior literature on the determinants of crash risk to include common institutional
ownership.
We posit that common ownership could mitigate crash risk for two reasons. First, common
institutional owners possess informational advantages in monitoring managerial behaviors that
engender crash risk. Jin and Myers (2006) and Bleck and Liu (2007) argue that in a market with
information asymmetry, managers may suppress bad news or support bad projects for a prolonged
period to benefit themselves at the expense of shareholders. Bad news hoarding conceals negative
information and allows it to accumulate until eventually reaching a tipping point, when the sudden
revelation of the accumulated bad news causes a stock price crash. We predict that common owners
play an integral monitoring role that deters managers from concealing negative information. This
is because when a large shareholder owns equity blocks in multiple firms within the same industry,
this shareholder has economies of scale in acquiring industry-specific information and can thereby
develop industry expertise (Kacperczyk et al. 2005). This expertise consequently enables the
common owner to better identify and constrain bad news hoarding behaviors of firms in their
6
Kim et al. (2011a, 641) state that “unlike the risks stemming from symmetric volatilities, the risk of (extreme) losses
cannot be reduced through diversification.” Some economists (e.g., Bates 2000) and industry practitioners also argue
that investors face challenges in effectively hedging against crash risk even when using derivative securities.
2

portfolios, resulting in a lower crash risk.
Second, common owners can benefit from the internalization of externalities and should
therefore have greater incentives to discipline bad news hoarding and overinvestment. Building on
the literature on positive governance externalities (Acharya and Volpin 2010; Dicks 2012), some
recent studies argue that common owners can benefit not only from improved governance at the
focal firm, but also from subsequent governance improvements at peer firms in their portfolios
(He et al. 2019). These studies imply that if a common owner takes action against bad news
hoarding or overinvestment in one firm, then this common owner can benefit from reduced crash
risk in the focal firm and from positive externalities in the peer firms. In addition, a firm’s bad
news hoarding behaviors have negative externalities. When a firm withholds bad news, its inflated
financial performance could distort the reporting choices and the investment decisions of peer
firms (Kravet and Shevlin 2010; Beatty et al. 2013; Li 2016). As an example, Sidak (2003, 209)
points out that WorldCom’s “accounting fraud encouraged [competitors’] overinvestment.”
Furthermore, a stock’s price crash has negative externalities and often leads to stock price crashes
of its industry peers (Brochet et al. 2018), and correlated crashes are especially costly to common
owners of industry peers. To eschew inflicting these negative externalities and to benefit from the
positive externalities, common owners should have stronger incentives to constrain bad news
hoarding and overinvestment by firms in their portfolios, thereby reducing crash risk.
Nevertheless, there are at least two reasons why common ownership may be positively
related to stock price crash risk. First, Dhaliwal et al. (2014) predict that firms may disclose and
recognize bad news more promptly to induce rivals to under-produce, and they find a positive and
significant relation between product market competition and accounting conservatism. To the
extent that product market competition can encourage timely recognition of bad news, common

ownership may be positively associated with crash risk through an anticompetitive effect (e.g.,
Azar et al. 2018). Second, research on funding liquidity and commonality in liquidity implies that
common owners with funding liquidity shocks may have to fire-sell portfolio stocks (e.g.,
Brunnermeier and Pedersen 2009; Koch et al. 2016), which increases their industry-peer stocks’
price fragility due to a deterioration in market liquidity and leads to a positive relation between
common ownership and crash risk of these stocks.
We test these competing hypotheses empirically using a sample of U.S. firms from 1980
through 2017. Following He and Huang (2017), we construct three common ownership measures:
an indicator variable for firms with common ownership, the number of a firm’s common owners,
and the number of a firm’s industry peers connected through common owners. Our dependent
variable, stock price crash risk, has two widely used proxies in the literature (e.g., DeFond et al.
2015). Ncskew is the negative skewness of firm-specific weekly returns for a firm during the year,
and Duvol (down-to-up volatility) is the logarithm of the ratio of the standard deviations of firm-
specific returns on down weeks to the standard deviations of firm-specific returns on up weeks
during the year. We regress these crash risk measures on the common ownership proxies,
controlling for a range of firm and institutional investor characteristics, firm fixed effects, and
blockholder fixed effects. The regression results show that the effect of common ownership on
stock price crash risk is negative and statistically significant. The finding is also economically
significant because the presence of common ownership is associated with an 8.0% decrease in
Ncskew. Our main inference holds in robustness tests that use alternate common ownership
measures based on other industry classification methods and alternate model specifications with
additional control variables.
Although the firm fixed effects and blockholder fixed effects in the baseline model should

mitigate most endogeneity concerns, we conduct two additional tests to strengthen the causal
interpretation. First, to help rule out reverse causality, we follow Ramalingegowda et al. (2021)
and regress our common ownership measures on lagged crash risk measures and control variables
using a subsample of firms with no common ownership in the prior three years. The results show
no statistically significant relation between lagged crash risk and current common ownership,
mitigating the reverse causality concern. Second, we leverage exogenous variation in common
ownership driven by financial institution mergers and apply a DiD approach. Following He and
Huang (2017), we define treatment firms as those that experienced an increase in common
ownership due to financial institution mergers, and control firms are those blockheld by one merger
partner with no industry rivals blockheld by the other partner. We find that treatment firms, relative
to the control firms, have a significant reduction in crash risk after the mergers. This finding holds
in a regression on a reduced sample that excludes mergers occurring during the 2008–2009
financial crisis. Furthermore, we conduct a placebo test using “pseudo-event” years and find no
statistically significant treatment effect.
Next, we conduct cross-sectional analyses on the mechanisms through which common
ownership influences crash risk. We find that the effect of common ownership on crash risk is less
pronounced in firms followed by industry-specialist analysts. This finding is consistent with the
intuition that industry-specialist analysts diminish the information advantage of common owners,
thereby moderating the impact of common ownership. We also find that the effect of common
ownership is stronger in firms with greater opacity (Hutton et al. 2009). Furthermore, because
firms in industries where managers have more outside options should have greater governance
externalities, we follow He et al. (2019) and use the industry homogeneity index to capture the
extent of externalities. We find that the negative relation between common ownership and crash

risk is concentrated in firms with greater externalities, suggesting that the internalization of
externalities motivates common owners to become better monitors. 7
We then investigate whether common owners reduce crash risk by curbing the primary
driver of crash risk—bad news hoarding (Jin and Myers 2006). Prior literature shows that equity
investors demand accounting conservatism as a governance device because it can constrain
management’s ability to overstate accounting numbers and effectively reduce bad news hoarding
(Ramalingegowda and Yu 2012; Kim and Zhang 2016). We therefore conjecture that common
owners are likely to promote accounting conservatism to constrain bad news hoarding and thus
reduce crash risk. To test this conjecture, we perform two-stage regression analyses following Di
Giuli and Laux (2022). We provide evidence that common ownership is positively related to
accounting conservatism, and the conservatism induced by common ownership is significantly and
negatively related to crash risk. In addition, we find that common ownership negatively affects a
firm’s tendency to continue supporting bad projects, leading to a lower crash risk. These two tests
provide tentative evidence that constraining bad news hoarding ex ante is the intermediate step by
which common owners to reduce crash risk. Lastly, we explore the ex-post actions that common
owners take to discipline executives of firms with high crash risk. We find that common ownership
accentuates the positive relation between crash risk and the likelihood of CEO turnover, suggesting
that common owners dismiss CEOs of high crash-risk firms to hold them accountable.
Our study contributes to the extant literature in several ways. First, it extends the
burgeoning stream of research on common ownership by examining its consequences from a stock
market perspective. The six-fold increase in common ownership in the past few decades has ignited
considerable debate on whether common ownership can mitigate firm incentives to compete in
7
Our cross-sectional test results hold in the DiD setting as well.
6

product markets (He and Huang 2017; Azar et al. 2018). Despite the rapid expansion of this
literature, existing studies largely focus on the impact of common ownership on product market
outcomes and firm policies (e.g., Azar et al. 2018; Ramalingegowda et al. 2021; DesJardine et al.
2022, 2023; Chen et al. 2023). Our study complements and extends this literature by focusing on
stock market outcomes and shedding light on one more economic benefit of common ownership—
the reduction in stock price crash risk, which is an important consideration for investors.
Additionally, to the best of our knowledge, this study is the first to document that common
ownership reduces crash risk by promoting accounting conservatism and constraining corporate
overinvestment behaviors.
Second, we contribute to the crash risk literature by introducing common ownership as a
new determinant. Prior studies identify various determinants of crash risk. 8 Our findings are most
closely related to research on the role of institutional investors in shaping crash risk (An and Zhang
2013; Callen and Fang 2013; An et al. 2014; Andreou et al. 2016). These studies find a generally
positive, but somewhat mixed, relation between institutional ownership and crash risk. In addition,
they treat institutional investors’ holdings in each firm as separate positions, ignoring
interconnections through institutional cross-holdings. In contrast, our study examines a related but
distinct concept—common ownership. We focus not on the level of institutional ownership per se,
but rather on large blockholders who act as a nexus of industry peer firms through cross-holdings.
Although previous evidence on the effect of common ownership on crash risk is lacking,
two contemporary studies are closely related to our study. First, Cheng et al. (2023) investigates
8
These factors include financial reporting quality (Hutton et al. 2009; Kim et al. 2016a; Kim and Zhang 2016), tax
avoidance (Kim et al. 2011a), executive compensation (Kim et al. 2011b), religiosity (Callen and Fang 2015),
mandatory adoption of International Financial Reporting Standards (DeFond et al. 2015), auditor industry
specialization (Robin and Zhang 2015), CEO overconfidence (Kim et al. 2016b), stock market liquidity (Chang et al.
2017), real earnings management (Khurana et al. 2018), insider share pledging (Dou et al. 2019), and enforcement by
the U.S. Internal Revenue Service (Bauer et al. 2021), among others.
7

the role of common ownership in facilitating the contagion of crash risk from one firm to another.
Second, Li et al. (2022, 2) find a negative relation between common ownership and stock price
crash risk; however, their argument is that “industry common owners’ information advantage
allows them to avoid selling on false spillover signals from industry peers, which in turn reduces
stock price crash risk.” They conclude, on page 2, that “our contribution is identifying an
information based spillover story that predicts a stabilizing effect.” Overall, Cheng et al. (2023)
and Li et al. (2022) do not reveal whether common owners influence stock price crash risk that
originates within a focal firm, which is the main focus of the crash risk literature. Differing from
these studies, our study argues and provides evidence that common owners reduce crash risk
because they have an information advantage and governance incentives to constrain the focal
firm’s bad news hoarding. 9
Finally, our findings offer implications for regulators and investors. Recently, common
ownership has come under scrutiny from regulators in the European Union and the U.S. The
Federal Trade Commission (FTC) Commissioner, Noah Phillips, comments that “Some concerned
with common ownership have proposed remedies that are quite dramatic. … I find the common
ownership particularly interesting because it takes place at the intersection of antitrust, corporate,
and securities law and policy.” 10 Whereas law professors including Elhauge (2016) and Posner et
al. (2017) offer several recommendations for regulating common ownership, Rock and Rubinfeld
(2017, 1) argue that these recommendations may be misguided and are likely to have a chilling
9
Another related study, Jiang et al. (2022), finds a negative relation between common ownership and crash risk in a
sample of Chinese firms. But, Jiang et al.’s (2022, 908) main finding only holds in the state-owned enterprises (SOE)
subsample, and they find “no such results in non-state-owned enterprises subsamples.” Thus, whether common
ownership has a significant negative effect on crash risk in public firms in developed markets remains an open and
important question.
10
See page 3 of the opening remarks of Commissioner Noah J. Phillips in FTC Hearing #8: “Competition and
Consumer Protection in the 21st Century Corporate Governance, Institutional Investors, and Common Ownership.”
8

effect on “the valuable role of institutional investors in corporate governance.” Against this
backdrop, our study provides evidence that common institutional owners indeed play a unique,
valuable role in monitoring firms and reducing bad news hoarding and crash risk. Thereby, our
study contributes to the ongoing debate by offering a more balanced view of common ownership
and its economic consequences. In addition, stock price crashes are an important concern for
investors, especially following high-profile scandals such as Enron and WorldCom. Our findings
suggest that common ownership is associated with an economically significant reduction in crash
risk. 11 These findings could be useful for investors in assessing investment risk and designing
portfolios with reduced crash risk.
2. Hypothesis development
The classical literature on crash risk proposes that bad news hoarding is the primary cause
of stock price crash risk. These studies argue that self-interested insiders tend to withhold bad news
from outsiders, which may give rise to severe overvaluation of share prices (Jin and Myers 2006;
Hutton et al. 2009). When the stockpiled bad news reaches a tipping point, it usually comes out all
at once and results in a sudden stock price crash. Other studies suggest that insiders have incentives
to retain bad projects for extended periods, resulting in overinvestment (Bleck and Liu 2007;
Benmelech et al. 2010). To derive private benefits, the insiders not only delay taking corrective
actions on poor-performing projects, but may also invest more into these projects to conceal the
poor performance. The negative performance of the bad projects will continue and may eventually
result in a stock price crash. These two explanations of crash risk are not mutually exclusive causes
of stock price crashes because the latter one can be regarded as a specific type of bad news hoarding.
11
Kelly and Jiang (2014) find that stocks with greater tail risk have 5.4% higher required returns than their lower-
risk counterparts. To the extent that a higher required return negatively affects firm value by increasing the discount
rate, our findings imply that common ownership has a beneficial effect on firm value through reducing left-tail risk.
9

Prior literature on institutional investors suggests that these investors have two opposing
effects on firm behaviors. On the one hand, institutional investors play a monitoring role in firm
decisions, either through direct intervention (McCahery et al. 2016) or indirectly (Admati and
Pfleiderer 2009; Edmans and Manso 2011; Bharath et al. 2013). On the other hand, some studies
argue that institutional investors have little or even a negative impact on corporate performance
and governance because many institutions are short-term investors or prefer to vote with their feet
rather than engage in costly monitoring (Bushee 1998; 2001). These contrasting views yield
different predictions and mixed evidence on the relation between different types of institutional
investors and crash risk (An and Zhang 2013; Callen and Fang 2013; An et al. 2014; Andreou et
al. 2016). The overall positive relation between total institutional ownership and crash risk
documented in these studies suggests that the majority of institutional investors do not serve as
effective monitors. Nevertheless, we have several reasons to believe that the unique characteristics
of common institutional blockholders should enable them to play an effective monitoring role.
First, unlike investors who only blockhold the shares of one firm in an industry, common
owners of multiple same-industry companies have economies of scale in information acquisition
and processing. Industry peers are subject to similar influences from macroeconomic and industry
factors so common owners can focus on collecting firm-specific information without having to
duplicate the effort of gathering industry-level information. Efficiency gains may also come from
information processing. Industry peer firms provide similar products and services and compete in
the same product markets, so they usually comove in performance (Hoberg and Phillips 2012;
Hameed et al. 2015; De Bodt et al. 2020). Accordingly, common owners can extrapolate findings
from their analysis of one firm to peer firms.
Economies of scale in information acquisition and processing would improve the ability of
10

common owners to act as effective monitors. This is because economies of scale would allow them
to acquire superior information and develop industry expertise, enabling them to better identify
irregularities in a firm’s performance and financial reporting. For instance, common owners may
compare financial reporting and other information across industry peers, thereby increasing their
likelihood of detecting bad news hoarding by a particular firm. 12 As another example, common
owners might be better at differentiating firm-specific factors from common shocks to the firms’
product markets (Jayaraman et al. 2021), facilitating more effective monitoring of overinvestment
in inefficient projects and ultimately resulting in lower crash risk.
Second, some scholars including Acharya and Volpin (2010) argue that a firm’s corporate
governance has positive externalities on peer firms. Gao and Zhang (2019) demonstrate that a
firm’s investment in internal controls not only reduces its own managers’ accounting manipulation,
but also alleviates pressure to manipulate for managers at peer firms. Dicks (2012, 1998) argues
that “because firms do not enjoy the full benefit of their governance, there is a positive externality
to governance,” which could be addressed by market-based solutions. Another stream of literature
suggests that a firm’s behaviors may generate negative externalities for its industry peer firms.
Beatty et al. (2013) and Bustamante and Fresard (2021) argue that if a firm conceals bad news or
overinvests, these behaviors will paint a misleading picture of future industry prospects, thereby
leading industry peer firms to overinvest. These studies suggest that both bad news hoarding and
overinvestment by a firm have negative externalities and lead to industry peers’ overinvestment.
Related to the externality literature, some recent studies show that common ownership
provides a market-based mechanism for internalizing the positive externalities (He et al. 2009).
12
If common owners can uncover bad news hoarding, they can also trade on their superior information. That is, in
addition to monitoring insiders to reduce bad news hoarding, common owners can sell their holdings of firms that
conceal bad news. These transactions can impound the hidden bad news into stock prices, reducing future crash risk.
11

This occurs because common owners can benefit not only from improved governance of the focal
firm, but also from the spillover effect on the governance of industry peers. Relative to institutions
that blockhold only one firm in an industry, common owners should have greater incentives to
monitor their portfolio firms owing to the benefits of internalizing governance externalities. 13 The
negative externality literature suggests that accounting manipulation problems are particularly
costly to common owners because one portfolio firm’s overstatement may cause overinvestment
and value loss in other industry peer firms in the portfolio (Ramalingegowda et al. 2021). Common
owners also suffer from another type of negative externalities related to crash risk. If a stock has a
crash, then it possibly has a spillover effect, which leads to significant drops of its industry peers’
stocks (Hoberg and Phillips 2012; Brochet et al. 2018). Because common owners have significant
positions across industry peers, this negative externality is costlier for them. Taken together, the
benefits of internalizing positive externalities and the cost of negative externalities incurred by
other firms in the portfolio should provide common owners with stronger incentives to constrain
the focal firm’s bad news hoarding and overinvestment problems, leading to lower crash risk.
The two arguments above lead to the same prediction—a negative relation between
common ownership and crash risk. Nevertheless, we might not observe this negative relation for
two reasons. First, Darrough and Stoughton (1990) and Dhaliwal et al. (2014) show that a firm
may disclose and recognize bad news more quickly to discourage new entry or induce rivals to
under-produce. If product market competition increases timely disclosure of bad news, the anti-
competitive effect (Azar et al. 2018) would suggest a positive relation between common ownership
13
We are not arguing that common owner blockholders have greater influence over firms than non-common owner
blockholders. Instead, our argument hinges on the stronger incentives of common owners to monitor. Even if all
blockholders have the same ability to influence firms’ actions, the one with greater incentives to monitor due to the
benefits of internalizing governance externalities would play a more significant monitoring role.
12

and crash risk. However, some studies suggest that whether common ownership affects
anticompetitive behavior remains an ongoing debate (Lewellen and Lowry 2021; Dennis et al.
2022). Therefore, common ownership may not have a significant effect on crash risk. Second, if a
common owner experiences a funding liquidity shock, this investor may have to fire-sell some
stocks to raise money, deteriorating these stocks’ market liquidity (Brunnermeier and Pedersen
2009). Their reduced market liquidity impairs the liquidity of industry peer stocks, especially those
sharing common investors (Chordia et al. 2000; Anton and Polk 2014; Koch et al. 2016). As such,
the deterioration of portfolio stocks’ liquidity would further tighten the funding liquidity of the
investors and force them to sell even more portfolio stocks to meet the liquidity need, exacerbating
the downward liquidity spiral and inducing stock price crashes across industry peer firms. In
summary, these two effects could mitigate the aforementioned negative effects of common
ownership on crash risk, leading to an insignificant relation between common ownership and crash
risk. Accordingly, we follow Lang and Lundholm (1996) and Chang et al. (2016) and state the
hypothesis in the null form:
HYPOTHESIS. Common institutional ownership is unrelated to stock price crash risk.
3. Data, variables, and research design
Data sources and sample selection
Our sample includes U.S. firms with common stocks listed on the New York Stock
Exchange (NYSE), Nasdaq, and American Stock Exchange (AMEX) in 1980-2017. We source
institutional ownership 13-F data from the Thomson Reuters Ownership Database, stock data from
the Center for Research in Security Prices (CRSP) Database, and financial information from the
Compustat Database. 14 Following Kim et al. (2011a) and Chang et al. (2017), we exclude
14
To mitigate the concern that Thomson Reuters’ 13-F data may be stale, we construct alternative common ownership
13

observations with negative book values of equity, year-end stock prices less than $1, and
observations with fewer than 26 weeks of stock return data. We further exclude financial and utility
firms and observations with insufficient data for constructing the crash risk measures, common
ownership proxies, or control variables. Our final sample consists of 96,119 firm-year observations.
Variables and the regression model
We follow Hutton et al. (2009) and Kim et al. (2011a) and construct stock price crash risk
measures in two steps. First, we estimate the component of stock returns that is orthogonal to
market and industry returns, firm-specific weekly returns (Wit). Second, we use Wit to construct
two measures. Ncskew is the negative skewness of firm-specific weekly returns for the firm during
a year. Intuitively, Ncskew measures left tail thickness. Our second crash-risk measure, “down-to-
up volatility” (Duvol), is the log of the ratio of the standard deviation of firm-specific returns in
down weeks to that in up weeks during a year. A stock with a higher value of Duvol is likely to be
more crash prone. Compared with Ncskew, this measure may be less influenced by a small number
of extreme returns because it does not involve the third moment (Chen et al. 2001). 15
Common ownership arises when an institution concurrently blockholds more than one firm
in the same industry in a particular period. We follow He and Huang (2017) and define
blockholders as institutional investors with at least 5% ownership in a firm. We focus on
blockholders because they have sufficient influence on managers through private communications
measures using 13-F data from Backus et al. (2021). Backus et al. scraped the data directly from SEC 13-F filings.
We report the results in panel A of Internet Appendix Table IA.1. Our main finding is robust to the use of this alternative
institutional ownership data source.
15
Following Hutton et al. (2009), we also define an indicator variable, Crash, that equals to one if the firm has one
or more weekly returns falling 3.2 or more standard deviations below the mean firm-specific weekly return in a year,
and zero otherwise. We estimate logistic regressions of Crash on the common ownership measures and other controls
in the baseline model. We find negative but statistically insignificant coefficients on common ownership in this
untabulated test. This weak result is likely to be driven by the small variation in the Crash indicator and the fact that
our baseline regression includes firm fixed effects.
14

and voting (McCahery et al. 2016). 16 We capture a firm’s common-ownership status in a given
year using three measures proposed by He and Huang (2017). The first measure, Com_Dummy, is
an indicator variable that equals one if at least one of the firm’s institutional blockholders
simultaneously blockholds other firms in the same industry, and zero otherwise. The second
measure, NumInve, is the number of a firm’s institutional blockholders that concurrently hold 5%
ownership or above in at least one other same-industry firm. The third measure, NumFirm, is the
number of same-industry peer firms that share a common institutional blockholder with the focal
firm. We log-transform one plus NumInve and NumFirm to reduce skewness.
Using these variables, we estimate the following baseline regression model:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖,𝑡𝑡+1 = 𝛽𝛽0 + 𝛽𝛽1 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑖𝑖𝑖𝑖𝑖𝑖,𝑡𝑡 + 𝛽𝛽2 𝑍𝑍𝑖𝑖,𝑡𝑡 + 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 +
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (1)
where i and t index firm and year, respectively. The dependent variable is one of the crash risk
measures, Ncskew or Duvol. The key independent variable, Common Ownership, is one of the
three common ownership proxies. Z denotes a vector of control variables, as detailed below. To
partially address concerns about reverse causality, we measure these independent variables with a
one-year lag relative to the dependent variables. Firm Fixed Effects isolate the effects of time-
invariant observable and unobservable firm attributes. Blockholder Fixed Effects address potential
omitted variable bias regarding time-invariant institution characteristics and also help to alleviate
the concern that individual common owners may have idiosyncratic preferences for firms with
16
In untabulated robustness checks, we try using different cutoff levels (e.g., 3.5%) to define common blockholders
and find our main findings remain qualitatively unchanged. Additionally, we use 3-digit SIC codes to identify same-
industry firms in main tests but in robustness checks, we also use alternate common ownership measures based on 4-
digit North American Industry Classification System (NAICS) and 4-digit Standard Industrial Classification (SIC)
codes and find qualitatively identical results. We tabulate these in panels B and C of Internet Appendix Table IA.1.
15

lower crash risk. The model also includes Year Fixed Effects. 17
Kim et al. (2011a, 2011b) guide our selection of the control variables. The vector of control
variables, Z, includes total assets (Size), market-to-book ratio (MTB), firm leverage (Leverage),
return on assets (ROA), average firm-specific weekly returns during the year multiplied by 100
(Return), stock return volatility (Sigma), stock turnover change (DTurn), and financial reporting
opacity (Opaque) measured by the moving sum of the absolute value of abnormal accruals in the
prior three years (Hutton et al. 2009). We also control for total institutional ownership (InstiOwn)
and the following institutional ownership factors. CrossDiff is an indicator that equals one if at
least one institutional blockholder of the firm holds equity blocks in firms from other industries
while not blockholding firms in the same industry during the year. We follow Ramalingegowda et
al. (2021) and control for the presence of large shareholders using BlockD, which equals one if the
firm has at least one blockholder, and zero otherwise. We also control the effect of the quasi-index
ownership (IOQix). 18 By explicitly controlling for these institutional ownership factors, we ensure
that the coefficients on Common Ownership capture the incremental effect of common ownership
on crash risk. To minimize the effects of outliers, we winsorize all continuous variables at their 1st
and 99th percentiles. Appendix A presents the detailed variable definitions.
Table 1 presents summary statistics for the variables used in the baseline regression. The
means (standard deviations) of Ncskew and Duvol are −0.250 (0.659) and −0.076 (0.364),
respectively. The mean of Com_Dummy indicates that approximately 54% of the firm-years are
17
In a robustness check, we use industry×year fixed effects to control the effects of time-varying industry
characteristics. Panel D of Internet Appendix Table IA.1 indicates that our main findings are qualitatively unchanged.
18
To ensure our main finding is not driven by passive ownership of quasi-indexers, we control for IOQix in the
baseline regressions and throughout the main tests. However, IOQix is positively correlated with InstiOwn, so
including both IOQix and InstiOwn may lead to multicollinearity problem. To mitigate this concern, we also estimate
a modified version of the baseline model by excluding IOQix and find that our main finding holds in this untabulated
robustness check.
16

held by at least one common owner. The means of LnNumInvt and LnNumFirm are 0.591 and
1.105, suggesting that an average firm has approximately two common owners and shares common
owners with approximately three industry peer firms. These values are generally similar to those
reported in the crash risk literature and the common ownership literature (Kim and Zhang 2016;
He and Huang 2017; Kim et al. 2019). The mean value of the average firm-specific weekly returns
multiplied by 100 (Return) and the mean value of Sigma are −0.27 and 0.06, which are comparable
to the corresponding figures (−0.22 and 0.05) in Kim et al. (2011a). The average total institutional
ownership level (41.6%) is slightly higher than the corresponding mean value (36.8%) in He and
Huang (2017), which examines an earlier sample period. The mean value of BlockD suggests that
approximately 65% of the observations have at least one institutional blockholder. 19
4. The relation between common ownership and stock price crash risk
Baseline regression results
In Table 2, columns (1)–(3) and (4)–(6) present the baseline regressions for Ncskew and
Duvol, respectively. The coefficients on the common ownership measures are all negative and
significant across these regressions, which suggests that crash risk is lower in firms held by
common owners. Turning to the control variables, the results indicate that crash risk increases with
the level of institutional ownership (InstiOwn), which is consistent with findings in An and Zhang
(2013) and Callen and Fang (2013). The significantly negative coefficients on quasi-indexer
ownership (IOQix) suggests that quasi-indexer institutions are effective monitors (Hillegeist and
Weng 2021). Taken together, the findings suggest that common ownership has incremental
explanatory power for crash risk that goes beyond the effect of total institutional ownership.
19
To mitigate the concern that Con_Dummy may pick up the effect of blockholders, we conduct a reduced-sample
test where we limit the sample to firm-years with BlockD equal to one and then re-estimate the baseline regressions.
The results in panel E of Internet Appendix Table IA.1 indicate that the coefficients on Con_Dummy remain negative
and significant.
17

Our main finding is also economically meaningful. The coefficient on Com_Dummy in the
first column (−0.02) suggests that the presence of common ownership is associated with an 8.0%
(= 0.02/0.25) decrease in negative skewness, where 0.25 is the magnitude of average Ncskew. In
columns (2) and (3), the coefficients on LnNumInve and LnNumFirm are −0.042 and −0.011,
respectively. We gauge the economic significance of these two coefficients by estimating changes
in Ncskew when the common ownership measures shift by one standard deviation. When
LnNumInve (LnNumFirm) increases by one standard deviation, the corresponding decrease in
Ncskew is 0.026 (0.013), which is significant given that the mean value of Ncskew is −0.25. The
coefficients on common ownership in the regressions of Duvol are also economically significant.
We also conduct sensitivity tests to establish the robustness of our main finding. For brevity,
we report these results in the Internet Appendix. First, we estimate alternative model specifications
with additional control variables. To rule out the possibility that our finding is driven by the
contagion of tail risk across industry peers that share common owners with a focal firm (Cheng et
al. 2023; Li et al. 2022), we include the value-weighted average crash risk of these industry peers,
VWNcskew or VWDuvol, as an additional control. Consistent with Cheng et al. (2023), Table IA.2
in the Internet Appendix indicates that a firm’s crash risk is positively correlated with the average
crash risk of its industry peers that share the common blockholders. In addition, we find that the
common ownership proxies continue to be negatively and significantly related to crash risk. To
mitigate the impacts of other factors, we further control for CEO and chief financial officer (CFO)
compensation incentives (Kim et al. 2011a; Anton et al. 2023), financial statement comparability
(Kim et al. 2016a), and bid-ask spread as a proxy for stock liquidity (Chung and Zhang 2014;
Chang et al. 2017) in the baseline regression model. Table IA.3, panels A–C show that the
coefficients on the common ownership measures remain negative and significant.
18

Identification strategies
In the baseline model, we bolster causal inference by including key determinants of crash
risk, firm fixed effects, and blockholder fixed effects. All of these should limit the possibility that
cross-sectional variation in firm attributes spuriously drives the negative relation between common
ownership and crash risk. In this section, we aim to further alleviate endogeneity concerns.
First, one may argue that the negative relation between common ownership and crash risk
is driven by the possibility that institutional investors prefer holding good-governance firms that
tend to have lower crash risk (Chung and Zhang 2011; McCahery et al. 2016). We conduct a
falsification test to mitigate this self-selection concern. If common owners self-select into low
crash-risk firms, then crash risk prior to the presence of common ownership should be negatively
associated with future common ownership. To rule out this possibility, we follow Ramalingegowda
et al. (2021) and regress common ownership on lagged crash risk measures and controls using a
subsample of firms with no common ownership in the prior three years. Table 3 indicates an
insignificant relation between lagged crash risk and current common ownership, providing no
evidence that common institutional investors self-select into low-crash firms.
Second, we conduct DiD analyses on financial institution mergers. If two merging
institutions blockhold two different firms in the same industry before a merger, then the merged
institution will become a common owner of these two firms afterward, generating a positive shock
to common ownership. He and Huang (2017) and others argue that institution mergers are likely
to be driven by exogenous reasons such as financial deregulation, rather than characteristics of the
firms held by the institutions (e.g., crash risk). Following these studies, we establish causality by
testing whether a firm’s crash risk significantly decreases after it experiences an exogenous
increase in common ownership due to financial institution mergers.
19

We obtain a list of financial institution mergers from He and Huang (2017). To be included
in the treatment group, a firm must satisfy two conditions in the quarter before the merger
announcement: (i) the firm is blockheld by one of the merging institutions, and (ii) the other
merging institution does not blockhold the same firm but blockholds at least one of its industry
peers in the same pre-merger quarter. Because a financial institution merger results in a larger
institution and causes other changes in the institution’s characteristics, we follow He and Huang
(2017) and define control firms as those blockheld by one merger partner with no industry rivals
blockheld by the other partner. As pointed out in He and Huang (2017, 2696), the only difference
between the treatment and control groups is that for the latter, the other party to the merger does
“not simultaneously block-hold same-industry rivals of these firms so that the control firms’ cross-
ownership would not change simply because of the merger.” Lastly, Sun and Abraham (2021)
suggest that for a setting like ours that has variation in treatment timing across treatment firms,
never-treated firms should be used as the control group. Therefore, we exclude firms that are ever
treatment firms from the control sample.
We examine a symmetric seven-year window surrounding the mergers. Our baseline DiD
test sample consists of 7,087 firm-year observations from 225 treatment firms and 1,182 control
firms. The sample size is comparable to those reported in He and Huang (2017) and Lu et al. (2022).
Using the treatment and control firm-year observations, we estimate the following DiD regression:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = 𝛽𝛽0 + 𝛽𝛽1 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 + 𝛽𝛽2 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 + 𝑍𝑍 + 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝜀𝜀 (2)
where Crash Risk is one of the crash risk measures. Treated is an indicator variable that equals one
for treatment firms and zero for control firms. Post is an indicator variable that equals one for one
of three post-event years, and zero otherwise. Z is a vector of the control variables used in our
baseline regression. The coefficient on Treated × Post identifies changes in crash risk for treatment
20

firms, relative to the control firms, following merger-induced common ownership changes. Lastly,
we follow He and Huang (2017) and include firm-merger fixed effects in the regressions. Because
a specific firm in a given merger can only be either a treatment or a control firm, the firm-merger
fixed effects make the Treated indicator unidentified and thus it is not included in model (2).
In panel A of Table 4, columns (1) and (2) present the DiD regressions without control
variables. The negative and significant coefficients on Treated × Post are consistent with our
conjecture that a treatment firm’s increase in common ownership after financial institution mergers
is accompanied by a significant reduction in stock price crash risk. Columns (3) and (4) report
model (2) with control variables. The coefficients on Treated × Post continue to be negative and
significant. These control variables, along with the firm-merger fixed effects, partially mitigate
omitted variable concerns and lend further credence to the argument that our DiD regression
findings can be attributed to the negative causal effect of common ownership on crash risk.
We conduct several supplemental tests to support the causal inference. First, we conduct a
dynamic DiD analysis. We replace the Post indicator with six separate indicator variables including
Pre(−2), Pre(−1), Post(0),Post(1), Post(2), and Post(3). These indicator variables equal one if an
observation is in the specific year relative to the merger event year, and zero otherwise. The
regressions also include the interaction terms between these indicator variables and Treated. Panel
B indicates that five of the six coefficients on the interactions between Treated and the post
indicators are negative and significant, supporting our main DiD regression finding in panel A.
The coefficients on Treated×Pre(−1) and Treated×Pre(−2) are statistically insignificant. This
finding suggests no significant difference in pre-treatment crash risk between the treated and
control firms, thereby validating the parallel trend assumption. Second, we conduct a placebo test
by moving the event year artificially back by five years. We then re-estimate the DiD regressions
21

without and with control variables and report the results in columns (1) and (2) and columns (3)
and (4) in panel C, respectively. As expected, we find insignificant coefficients on Treated×Post
across these regressions, suggesting no significant treatment effects surrounding these “pseudo-
event” years. Third, some mergers during a financial crisis may be contaminated by other
concurrent events. As suggested by Lewellen and Lowry (2021), we re-estimate the DiD regression
model (2) using a subsample that consists of observations outside the subprime crisis period. Panel
D, columns (1) and (2) indicate that our finding remains robust in this robustness check.
Lastly, He and Huang (2017) argue that their primary approach of identifying control firms
necessarily implies that treatment and control firms come from different industries. To mitigate the
concern that different industries may have different structural changes surrounding the merger
years, He and Huang (2017) and Lewellen and Lowry (2021) use a matching method to identify
an alternative control sample from the same industry. Following Lewellen and Lowry (2021), we
match each treatment firm with another firm that is in the same 3-digit SIC industry, has the closest
firm size, and is blockheld by a financial institution other than the merging institutions. This
alternative matching-sample procedure results in 210 pairs of treatment firms and control firms
and 2,548 firm-year observations for the DiD tests. Accordingly, we set an indicator variable,
Treated_Alt, to one if it is a treatment observation and zero if it is an observation from this
alternative control sample. We estimate a modified DiD regression model (2) by replacing Treated
with Treated_Alt and report the results in columns (3) and (4) of panel D. We find that the
coefficients on Treated_Alt×Post are negative and significant.
5. Cross-sectional evidence
Cross-sectional evidence: Information advantages of common ownership
22

In this section, we evaluate the plausibility of our conceptual framework by examining
whether the negative effect of common owners on crash risk stems from their information
advantages. First, we posit that the presence of industry-specialist analysts diminishes the
information advantage of common owners. Financial analysts collect information through
communications with management and other sources, which parallels the information acquisition
activities of sophisticated investors. Analysts who follow several firms in the same industry
accumulate a wealth of industry knowledge and develop industry expertise (Gilson et al. 2001;
Boni and Womack 2006). 20 The presence of these industry-specialist analysts should diminish the
information advantages of common owners, thereby moderating the disciplinary effect of common
ownership on stock price crash risk.
To test this conjecture, we define financial analysts as industry specialists if they cover at
least four firms within the same industry (Gilson et al. 2001) and construct an indicator variable,
High_Cover, which equals one if the number of industry-specialist analysts following a firm is
above the year-industry median, and zero otherwise. We modify equation (1) by including
High_Cover and its interaction with common ownership. Table 5, panel A, indicates that the
coefficients on the common ownership measures are all significantly negative, whereas the
coefficients on the interaction terms are all positive and five of them are statistically significant.
We also test whether the sum of the coefficients on common ownership and corresponding
interaction term is different from zero. The p values in row (a)+(b) indicate that the sum is
20
Brown et al. (2015, 25) ﬁnd that industry knowledge is the single most useful input to analysts’ earnings forecasts
and stock recommendations and show that “institutional investors highly value sell-side analysts’ industry knowledge,”
suggesting that research of sell-side analysts can be a source of industry knowledge for many institutional investors.
By producing industry knowledge and leveling the playing field for institutional investors, industry-specialist analysts
should make all institutional investors more informed, reducing the information advantage of common owners.
23

insignificantly different from zero in four of the six regressions, suggesting that the disciplinary
effect of common ownership on crash risk is mostly moderated by industry-specialist analysts.
Second, our information advantage argument implies that the negative effect of common
ownership on crash risk should be stronger in more opaque firms. This is because the information
advantages of common owners are likely to be greater, particularly when other market participants
are generally less informed. To test this conjecture, we modify the baseline model (1) by replacing
Opaque with High_Opaque and its interaction with common ownership, where High_Opaque
equals one if a firm’s opaqueness measure proposed by Hutton et al. (2009) is above the year-
industry median, and zero otherwise. 21 Consistent with our expectation, panel B of Table 5
indicates that the coefficients on the interaction terms are all negative and significant. The p values
in the row (a)+(b) are all significant, further confirming that the disciplinary effect of common
ownership is particularly strong in firms with greater opacity.
Third, we examine whether our cross-sectional test results hold in the DiD setting. We
modify the baseline DiD model (2) by including the additional interaction terms with High_Cover
and High_Opaque. 22 Consistent with the baseline DiD finding in panel A of Table 4, we continue
to find significant negative coefficients on Treated×Post. More importantly, the coefficients on
Treated×Post×High_Cover, the variable of interest in columns (1) and (2), are both positive and
significant. This finding is consistent with that in panel A—industry-specialist analysts moderate
the negative effect of common ownership on crash risk. In columns (3) and (4), the coefficients on
21
Research and development (R&D) projects are mostly industry-specific and thus industry expertise is required to
monitor overinvestments in R&D (Aboody and Lev 2000; Faleye et al. 2018). We use R&D as an opacity measure.
We also use reporting readability as an inverse measure of opaqueness (Li 2008; Kim et al. 2019). If the effect of
common owners on crash risk hinges on their information advantages, we should observe a stronger effect in high-
R&D or low-readability firms. We find evidence consistent with both conjectures in the untabulated robustness checks.
22
As discussed in section 4, because a specific firm in a given merger can only be either a treatment or a control firm,
the firm-merger fixed effects make the Treated indicator unidentified so it is not included in our regression. Similarly,
because we define High_Cover and High_Opaque indicators using pre-merger period data, their interactions with
Treated (i.e., Treated×High_Cover and Treated×High_Opaque) are also absorbed by the firm-merger fixed effects.
24

Treated×Post×High_Opaque are both negative and significant, confirming the finding in panel B
that the negative effect of common ownership on crash risk is more pronounced in opaque firms.
Cross-sectional evidence: Internalizing governance externalities
This section explores the second mechanism—greater monitoring incentives due to
externalities. We first use the magnitude of governance externalities as a moderator. He et al. (2019)
argue that in an industry with a more competitive managerial labor market, a firm is more likely
to tolerate managerial opportunism (e.g., withholding bad news) because it has greater difficulty
finding a replacement. However, if a firm disciplines bad news hoarding, other firms in the same
industry would be relieved from experiencing this “race to the bottom” game and benefit from
improved governance standards. Thus, the externalities should provide common owners in these
industries with stronger incentives to restrict bad news hoarding. To measure an industry’s labor
market competition, we follow He et al. (2019) and use the industry homogeneity index, which is
the industry average of the partial correlation coefficients between a firm’s stock returns and
industry returns after controlling for market returns (Parrino 1997). We set High_Homo to one
when an industry’s homogeneity index is above the sample median in a year, and zero otherwise.
Panel A of Table 6 reports a modified model (1), in which we add High_Homo and its interaction
with common ownership. The significantly negative coefficients on the interaction suggest that
internalizing governance externalities motivates common owners to curb bad news hoarding.
Prior studies argue that the attention that common owners pay to a firm increases with its
weight in their portfolios (Kempf et al. 2017; Gilje et al. 2020; Iliev et al. 2021). If common owners
are more attentive to a firm, managers have greater incentive to refrain from behaviors that cause
negative externalities, leading to a stronger effect of common ownership. To measure whether a
stock constitutes a larger proportion of common owners’ total portfolio values, High_Atten is set
25

to one if the average ratio of a firm’s market value of equity to common owners’ portfolio values
is above the year-industry median, and zero otherwise (Schmidt 2019). Consistent with our
conjecture, panel B of Table 6 shows that the coefficients on the interaction between common
ownership and High_Atten are negative and significant in four regressions. All p values in both
panels A and B suggest that common owners indeed have a stronger disciplinary effect on crash
risk when they are more likely to internalize externalities. Panel C presents cross-sectional tests in
the DiD setting. Similar to panel C of Table 5, we modify the baseline DiD model (2) by including
interactions with High_Homo and High_Atten. The significantly negative coefficients on the triple
interactions suggest that our main findings in panels A and B of Table 6 hold in the DiD setting.
Our hypothesized negative relation between common ownership and crash risk is
conceptually grounded in information advantages and governance incentives of common owners.
The findings in Tables 5 and 6 are consistent with our conjectures and shed light on these two
mechanisms. 23 Furthermore, these tests further alleviate the concern that some omitted variables
drive our results because it is less likely that these omitted variables could drive the cross-sectional
variation in the observed effects (Jiang 2017).
6. Do common owners reduce crash risk through curbing bad news hoarding?
Our theoretical arguments suggest that common owners could take actions to correct
managers’ bad news hoarding and overinvestment behaviors, reducing crash risk as a result. In
this section, we perform exploratory analyses to provide tentative evidence on this conjecture.
Do common owners promote accounting conservatism and consequently reduce crash risk?
Common owners can promote certain financial reporting practices to reduce bad news
23
To test the anticompetitive channel, we examine whether the relation between common ownership and crash risk
is less negative in firms facing higher pressure from product market competition, proxied by Hoberg et al.’s (2014)
market fluidity measure. The results in Table IA.4 of Internet Appendix do not offer significant supporting evidence.
26

hoarding behaviors. Prior literature shows that equity investors demand accounting conservatism
as a governance device because it can constrain managerial abilities to overstate accounting
numbers and effectively curb bad news hoarding (Ramalingegowda and Yu 2012; Kim and Zhang
2016). Because common owners may reap benefits of positive externalities from reduced bad news
hoarding of industry peers in their portfolios, they should have stronger incentives to promote
accounting conservatism in their portfolio firms. As such, we predict that common ownership
should have an incremental positive effect on accounting conservatism, which in turn leads to
reduced crash risk. To test our prediction, we follow Cheng et al. (2022) and Di Giuli and Laux
(2022) and estimate the following two-stage regressions:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖,𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂ℎ𝑖𝑖𝑖𝑖𝑖𝑖,𝑡𝑡 + 𝛽𝛽2 𝑍𝑍𝑖𝑖,𝑡𝑡 + 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (3-i)
� 𝑖𝑖,𝑡𝑡 + 𝛽𝛽2 𝑍𝑍𝑖𝑖,𝑡𝑡 + 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝜀𝜀𝑖𝑖,𝑡𝑡

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖,𝑡𝑡+1 = 𝛽𝛽0 + 𝛽𝛽1 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 (3-ii)
where CScore in equation (3-i) is the firm-year conservatism measure proposed by Khan and Watts
(2009). In the first stage, we regress CScore on common ownership and the set of control variables
in our baseline model. As shown in panel A of Table 7, the coefficients on the common ownership
proxies are all positive and significant. These results are consistent with our conjecture that higher
common ownership is associated with greater accounting conservatism.
� is the predicted CScore based

In the second stage, the key independent variable 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
on the first-stage regression (3-i). It captures the part of CScore that can be explained by common
ownership. If accounting conservatism induced by common ownership is indeed the channel by
� will be negative and

which common ownership reduces crash risk, the coefficients on 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
significant. The results in panel B are consistent with this conjecture. Additionally, if we multiply
� in column (1) of panel B by the corresponding coefficient on common

the coefficient on 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
27

ownership in panel A, the product (= −3.634×0.0056) is the same as the coefficient (−0.02) on
Com_Dummy in column (1) of Table 2. This suggests that the two-stage analysis essentially
decomposes the negative effect of common ownership on crash risk into two steps and enables us
to identify accounting conservatism as a transmission mechanism. Collectively, the findings in
panels A and B support those in prior studies (Ramalingegowda and Yu 2012; Kim and Zhang
2016). They also provide tentative support for the argument that common owners promote greater
accounting conservatism to reduce bad news hoarding and, consequently, reduce crash risk.
Do common owners constrain overinvestment and consequently reduce crash risk?
In section 2, we predict that common owners negatively affect crash risk through
constraining overinvestment—a type of bad news hoarding. To test this, we modify equations (3-
i) and (3-ii) by replacing CScore with an overinvestment measure. We use Biddle et al.’s (2009)
investment model and then sort the observations into quartiles based on the residuals from the
model. We classify observations in the top quartile in a year as over-investing firms and those in
the middle two quartiles as the benchmark group. The dependent variable in the first-stage
regression, OverInv, equals the residual of the investment model if an observation is classified as
over-investing, and zero if it is an observation in the benchmark group. Table 8, panel A shows that
the coefficients on the common ownership proxies are all negative and statistically significant,
supporting our prediction that common ownership is negatively related to overinvestment.
� , is
Panel B presents the second-stage regression. The key independent variable, 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂
the predicted OverInv based on the first-stage regression. It captures the part of OverInv that is
� are all positive and

explained by common ownership. We find that the coefficients on 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂
significant, suggesting that a lower level of overinvestment is associated with less crash risk. In
sum, panels A and B are consistent with the conjecture that common ownership can reduce
28

overinvestment and, consequently, lead to lower crash risk. The estimates in Tables 7 and 8 provide
tentative evidence that constraining bad news hoarding (e.g., promoting conservatism or reducing
inefficient investment projects) is the intermediate step for common owners to reduce crash risk.
7. How do common owners discipline managers of firms with high crash risk?
Thus far, we show that common owners alleviate bad news hoarding by promoting
accounting conservatism and curbing overinvestment, suggesting that common owners take ex
ante actions to reduce the likelihood of stock price crashes. It also stands to reason that common
owners take ex post actions to discipline managers responsible for stock price crashes. Firing top
executives is one of the most aggressive governance actions that large shareholders can take (Denis
et al. 1997; Bethel et al. 1998). Plenty of anecdotal and academic evidence shows that disagreement
between management and large shareholders leads to forced CEO turnover (Campbell et al. 2011;
Kang et al. 2018). Therefore, we conjecture that common owners have incentives to internalize
governance externalities by firing CEOs of high-crash-risk firms. By doing so, they can set a
precedent and deter executives of peer firms from increasing crash risk.
We obtain forced CEO turnover data from Peters and Wagner (2014). Forced equals one if
a firm has a forced CEO turnover in a given year, and zero otherwise. We regress Forced on our
common-ownership proxies, High_Crash, and the interactions between common ownership and
High_Crash. To mitigate the concern that our finding is driven by high institutional ownership,
we include an additional interaction term, InstOwn×High_Crash. Table 9 shows that the
coefficients on the interactions between common ownership and High_Crash are positive and
significant in five of the six regressions. 24 These results are consistent with our conjecture that
common owners are more likely to take actions to dismiss CEOs of high crash-risk firms.
24
The combined coefficients on a common ownership measure and the corresponding interaction term are statistically
significant in most regressions, consistent with Kang et al.’s (2018) finding that common owners are more likely to
29

8. Conclusion
U.S. public firms are increasingly connected with their industry peers through institutional
cross-blockholding. Common institutional ownership has emerged as a significant anticompetitive
concern among regulators and academics (Phillips 2018). Although recent studies shed
considerable light on the product market consequences of common ownership, there is a surprising
paucity of evidence on whether it has significant economic consequences for the stock market.
Our study proposes that common owners should have greater information advantages and
governance incentives to play a monitoring role in curtailing bad news hoarding and
overinvestment, leading to lower crash risk. Supporting the conjecture, we find a negative and
significant relation between common ownership and crash risk. The identification tests suggest
that the negative effect of common ownership on crash risk is causal. Our cross-sectional tests
support the argument that greater information advantages and stronger monitoring incentives are
the channels through which common owners exert a negative effect on the crash risk of the firms
in their portfolios. Next, we perform two-stage regression analyses and provide tentative evidence
that common owners take measures to mitigate bad news hoarding and overinvestment problems,
which in turn reduces crash risk. Lastly, we show that common owners take actions to penalize
managers who are responsible for stock crashes.
Overall, our findings suggest that unique features of common institutional blockholders
enable them to play an effective monitoring role in curbing crash risk. By identifying common
ownership as a significant determinant of crash risk, this study contributes new evidence to the
crash risk literature and offers valuable insights for investors to improve risk management. Our
findings also shed new light on additional economic benefits of common ownership (e.g.,
force CEO turnover. Our findings here complement their finding by showing that common owners have significantly
stronger incentives to discipline CEOs when a firm’s stock is more prone to crashes.
30

promoting conservative reporting and reducing inefficient firm investment), informing the ongoing
debate among scholars and policymakers regarding common ownership.
31

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36

APPENDIX A
Variable definitions
Variables Definitions
Dependent Variables of the Baseline Regression
Ncskew The negative skewness of firm-specific weekly returns during a year. Firm-
specific weekly returns are the residuals from the expanded index-model
regression (see, e.g., Hutton et al. 2009).
Duvol The logarithm of the ratio of the standard deviations of firm-specific returns in
down weeks to the standard deviations in up weeks during a year.
Key Independent Variables of the Baseline Regression
Com_Dummy An indicator variable that equals one if the firm shares at least one blockholder
with at least one same-industry firm in at least one of the four quarters within
a year, and zero otherwise. Industry classification is based on 3-digit SIC
industry code.
LnNumInve The natural logarithm of one plus the average number of the firm’s
blockholders that also blockhold at least one same-industry firm over the four
quarters within a year.
LnNumFirm The natural logarithm of one plus the number of same-industry peer firms that
share a common institutional blockholder with the focal firm in a year.
Control Variables in the Baseline Regression
Size The natural logarithm of a firm’s total assets.
MTB The ratio of market value to book value of total assets.
Leverage The ratio of total debt to total assets.
ROA The ratio of earnings before extraordinary items to total assets.
Return 100 times the mean value of firm-specific weekly returns during the year.
Sigma The standard deviation of firm-specific weekly returns during a given year.
Dturn Average monthly stock turnover over the current year minus those over the
previous year.
Opaque The moving sum of the absolute value of abnormal accruals in the prior three
years, where abnormal accruals are estimated using the modified Jones model.
InstiOwn Institutional ownership, defined as the sum of shares held by institutional
investors divided by the total number of shares outstanding.
CrossDiff An indicator variable that equals one if the firm shares at least one blockholder
with at least one different-industry firm in at least one of the four quarters
within a year while not blockholding firms within the same industry during the
year, and zero otherwise.
BlockD An indicator variable that equals one if a firm has at least one blockholder in a
year, and zero otherwise.
IOQix Quasi-indexer ownership, defined as the sum of shares held by quasi-indexers
divided by the total number of shares outstanding.
Key Variables used in Other Tests (sorted in Alphabetical Order)
CScore The accounting conservatism measure proposed by Khan and Watts (2009).
High_Atten An indicator variable that equals one if the average ratio of a firm’s market
value of equity to common owners’ portfolio values is above the year-industry
median, and zero otherwise.
An indicator variable that equals one if the number of industry-specialist
High_Cover
analysts following a firm is above the year-industry median, and zero
otherwise.
37

High_Homo An indicator variable that equals one when an industry’s homogeneity index is
above the sample median in a year, and zero otherwise.
High_Opaque An indicator variable that equals one if a firm’s opaqueness measure (Hutton
et al., 2009) is above the year-industry median, and zero otherwise.
Over-investment variable that equals the residuals of investment model if a firm
OverInv
is classified as over-investing, and zero if a firm is classified as in the
benchmark group.
An indicator variable that equals one for the years after the merger, and zero
Post
otherwise.
An indicator variable that equals one for treatment firms and zero for control
Treated
firms.
38

TABLE 1
Summary statistics
Variable N Mean SD Q1 Median Q3

Ncskew 96,119 -0.250 0.659 -0.573 -0.246 0.053
Duvol 96,119 -0.076 0.364 -0.317 -0.085 0.151
Com_Dummy 96,119 0.544 0.498 0.000 1.000 1.000
LnNumInve 96,119 0.591 0.609 0.000 0.693 1.099
LnNumFirm 96,119 1.105 1.182 0.000 1.099 1.946
Size 96,119 5.396 2.102 3.841 5.280 6.826
MTB 96,119 2.921 4.063 1.117 1.864 3.230
Leverage 96,119 0.473 0.213 0.310 0.480 0.626
ROA 96,119 0.032 0.204 0.008 0.074 0.126
Return 96,119 -0.271 0.361 -0.317 -0.148 -0.071
Sigma 96,119 0.060 0.034 0.035 0.051 0.075
DTurn 96,119 0.002 0.069 -0.017 0.000 0.018
Opaque 96,119 0.172 0.123 0.084 0.137 0.223
InstiOwn 96,119 0.416 0.309 0.129 0.379 0.675
CrossDiff 96,119 0.555 0.497 0.000 1.000 1.000
BlockD 96,119 0.647 0.478 0.000 1.000 1.000
IOQix 96,119 0.231 0.237 0.000 0.157 0.420
Notes: This table reports the summary statistics of the variables used in the baseline regression. Our sample
is comprised of firms listed on the Nasdaq, NYSE, and AMEX between 1980 and 2017. Appendix A
presents the variable definitions.
39

TABLE 2
The effect of common ownership on stock price crash risk
Dep Var= Ncskew Duvol

(1) (2) (3) (4) (5) (6)
Com_Dummy -0.020*** -0.013***
(-2.81) (-3.00)
LnNumInve -0.042*** -0.024***
(-5.99) (-5.43)
LnNumFirm -0.011*** -0.006***
(-3.36) (-3.15)
Size 0.070*** 0.069*** 0.070*** 0.036*** 0.036*** 0.036***
(11.59) (11.57) (11.65) (10.66) (10.66) (10.68)
MTB 0.004*** 0.004*** 0.004*** 0.003*** 0.003*** 0.003***
(4.88) (4.87) (4.88) (6.24) (6.25) (6.24)
Leverage -0.153*** -0.151*** -0.152*** -0.045*** -0.045*** -0.045***
(-6.95) (-6.88) (-6.94) (-3.76) (-3.68) (-3.75)
ROA 0.278*** 0.277*** 0.279*** 0.085*** 0.085*** 0.085***
(10.34) (10.26) (10.35) (5.51) (5.44) (5.53)
Return -0.099** -0.097** -0.099** 0.009 0.011 0.009
(-2.54) (-2.50) (-2.55) (0.48) (0.55) (0.47)
Sigma -2.410*** -2.364*** -2.415*** -0.261 -0.236 -0.265
(-4.80) (-4.76) (-4.81) (-1.01) (-0.92) (-1.03)
Dturn 0.263*** 0.264*** 0.263*** 0.157*** 0.158*** 0.157***
(5.64) (5.66) (5.63) (5.81) (5.84) (5.81)
Opaque 0.046** 0.046** 0.046** 0.034*** 0.035*** 0.034***
(2.21) (2.25) (2.21) (3.07) (3.10) (3.07)
InstiOwn 0.277*** 0.302*** 0.277*** 0.171*** 0.185*** 0.171***
(8.01) (8.55) (7.98) (8.13) (8.58) (8.15)
CrossDiff 0.027** 0.026** 0.027** 0.015** 0.014* 0.015**
(2.18) (2.05) (2.16) (1.98) (1.85) (1.96)
BlockD -0.017*** -0.015** -0.017*** -0.008** -0.007* -0.008**
(-2.87) (-2.41) (-2.90) (-2.21) (-1.79) (-2.22)
IOQix -0.073** -0.064* -0.072** -0.049** -0.044** -0.049**
(-2.05) (-1.79) (-2.04) (-2.39) (-2.13) (-2.39)
Constant -0.558*** -0.560*** -0.560*** -0.303*** -0.304*** -0.305***
(-13.05) (-13.16) (-13.24) (-12.42) (-12.54) (-12.59)
Firm Yes Yes Yes Yes Yes Yes
Blockholder Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes
N 96,119 96,119 96,119 96,119 96,119 96,119
R2 0.132 0.133 0.132 0.087 0.087 0.087
Notes: This table presents the baseline regression of stock price crash risk on common ownership. The
dependent variable is one of the crash risk measures, Ncskew or Duvol. The key independent variable is one
of the common ownership proxies, Com_Dummy, LnNumInve, or LnNumFirm. Control variables include
Size, MTB, Leverage, ROA, Return, Sigma, Dturn, Opaque, InstiOwn, CrossDiff, BlockD, and IOQix.
Appendix A presents the variable definitions. Continuous variables are winsorized at the 1% and 99% levels.
Standard errors are all heteroscedasticity robust, clustered by both firm and year. ∗, ∗∗, and ∗∗∗ represent
significance levels of 10%, 5%, and 1%, respectively.
40

TABLE 3
Addressing endogeneity concern: A falsification test
Dep Var= (1) (2) (3) (4) (5) (6)

Com_Dummy LnNumInve LnNumFirm Com_Dummy LnNumInve LnNumFirm
Ncskew -0.001 -0.001 -0.002
(-0.32) (-0.38) (-0.51)
Duvol -0.005 -0.004 -0.011
(-0.81) (-0.81) (-1.08)
Size 0.029*** 0.024*** 0.074*** 0.029*** 0.025*** 0.075***
(4.69) (4.36) (5.71) (4.72) (4.38) (5.73)
MTB -0.000 -0.000 -0.000 -0.000 -0.000 -0.000
(-0.46) (-0.82) (-0.04) (-0.44) (-0.80) (-0.02)
Leverage 0.010 0.003 -0.006 0.010 0.003 -0.006
(0.51) (0.20) (-0.15) (0.51) (0.20) (-0.15)
ROA -0.014 -0.012 -0.020 -0.014 -0.013 -0.022
(-0.93) (-0.94) (-0.65) (-0.99) (-0.98) (-0.70)
Return 0.014 0.015 0.039 0.015 0.015 0.040
(0.66) (0.79) (1.03) (0.69) (0.80) (1.05)
Sigma 0.001 0.035 0.193 0.007 0.039 0.207
(0.00) (0.13) (0.36) (0.02) (0.14) (0.38)
Dturn 0.060* 0.060* 0.184* 0.060* 0.060* 0.182*
(1.75) (1.71) (1.98) (1.73) (1.70) (1.97)
Opaque 0.023 0.023 0.032 0.023 0.023 0.032
(1.07) (1.31) (0.74) (1.07) (1.31) (0.74)
InstiOwn 0.479*** 0.447*** 0.695*** 0.480*** 0.447*** 0.695***
(9.87) (8.62) (7.98) (9.88) (8.62) (7.98)
CrossDiff 0.020 0.020* 0.032 0.020 0.020* 0.031
(1.47) (1.78) (1.28) (1.46) (1.78) (1.27)
BlockD -0.016* -0.016* -0.065*** -0.016* -0.016* -0.065***
(-1.75) (-1.95) (-3.88) (-1.75) (-1.95) (-3.88)
IOQix 0.116** 0.133** 0.164* 0.116** 0.133** 0.164*
(2.10) (2.49) (1.77) (2.11) (2.49) (1.78)
Constant -0.064* -0.074** -0.190*** -0.065* -0.074** -0.192***
(-1.97) (-2.48) (-2.72) (-2.00) (-2.51) (-2.75)
N 37,181 37,181 37,181 37,181 37,181 37,181
R2 0.349 0.383 0.384 0.349 0.383 0.384
Notess: This table reports the regressions of common ownership proxies, Com_Dummy, LnNumInve, and
LnNumFirm, on the prior-year crash risk measure (Ncskew or Duvol). The sample consists of firm-year
observations without common institutional ownership in the prior three years. Control variables include
Size, MTB, Leverage, ROA, Return, Sigma, Dturn, Opaque, InstiOwn, CrossDiff, BlockD, and IOQix.
Appendix A presents the variable definitions. Continuous variables are winsorized at the 1% and 99% levels.
Standard errors are all heteroscedasticity robust, clustered by both firm and year. ∗, ∗∗, and ∗∗∗ represent
41

TABLE 4
Addressing endogeneity concern: DiD analyses on financial institution mergers
Panel A: DiD regression analysis on financial institution merges

Dep Var= (1) Ncskew (2) Duvol (3) Ncskew (4) Duvol
Post 0.044 0.006 -0.002 -0.020**
(1.60) (0.50) (-0.18) (-2.13)
Treated×Post -0.135*** -0.057*** -0.128*** -0.055***
(-4.68) (-2.93) (-4.57) (-3.85)
Controls No No Yes Yes
Firm-Merger FEs Yes Yes Yes Yes
N 7,087 7,087 7,087 7,087
R2 0.044 0.035 0.070 0.067
Panel B: DiD regressions with dynamic effects
Dep Var= (1) Ncskew (2) Duvol
Treated×Pre(-2) -0.121 -0.044
(-0.79) (-0.47)
Treated×Pre(-1) -0.108 -0.055
(-0.94) (-0.89)
Treated×Post(0) -0.016 -0.000
(-0.23) (-0.01)
Treated×Post(1) -0.079* -0.032
(-1.70) (-1.43)
Treated×Post(2) -0.187*** -0.071**
(-3.65) (-2.31)
Treated×Post(3) -0.327** -0.154*
(-2.49) (-1.87)
Controls Yes Yes
Firm-Merger FEs Yes Yes
N 7,087 7,087
R2 0.070 0.068
Panel C: Placebo tests
Post -0.017 -0.004 -0.089*** -0.042***
(-0.95) (-0.53) (-3.78) (-4.66)
Treated×Post -0.013 -0.009 -0.003 -0.005
(-0.28) (-0.29) (-0.06) (-0.13)
Controls No No Yes Yes
N 6,487 6,487 6,487 6,487
R2 0.033 0.024 0.048 0.035
Panel D: Robustness checks
Baseline DiD test using a sample Use an alternative control group
excluding mergers in 2008-2009 that consists of same industry size-
matched control firms
Post -0.020 -0.001 0.044 0.003
42

(-0.67) (-0.04) (0.96) (0.14)
Treated×Post -0.116*** -0.063**
(-2.91) (-2.08)
Treated_Alt×Post -0.115** -0.062**
(-2.70) (-2.21)
Controls Yes Yes Yes Yes
N 2,484 2,484 2,548 2,548
R2 0.104 0.110 0.087 0.063
Notes: Panel A presents the DiD regressions that exploit the exogenous increase in common ownership
driven by financial institution mergers. We study a symmetric seven-year window around the event year
(i.e., three years before and three years after the institution merger and the year of the merger). The
dependent variables are the crash risk measures, Ncskew and Duvol. Treated is an indicator variable that
equals one for treatment firms and zero for control firms. The treatment firms are those blockheld by only
one of the merging institutions during the quarter preceding the merger announcement date, whereas the
other merging institution blockholds other firms in the same industry during the same pre-merger quarter.
The control firms are those blockheld by the merger partner with no industry rivals blockheld by the other
partner. Post is an indicator variable that equals one for the post-event period, and zero otherwise. Columns
(1)-(2) present the regressions without control variables, and columns (3)-(4) present the baseline DiD
model with control variables, including Size, MTB, Leverage, ROA, Return, Sigma, Dturn, Opaque,
InstiOwn, CrossDiff, BlockD, and IOQix. Panel B presents the DiD regressions with dynamic effects. Pre
(−1) (Pre (−2)) is an indicator variable that equals one if an observation is in the one year (two years)
before the merger, and zero otherwise. Post (0) (Post (1), Post (2) or Post (3)) is an indicator variable that
equals one if an observation is in the merger year (one year, two years, or three years after the merger), and
zero otherwise. Panel C presents a placebo test, in which we artificially shift the event year back by five
years and rerun the DiD regressions. In columns (1)-(2) of panel D, we rerun the baseline DiD regression
in panel A using a reduced sample that excludes the mergers in 2008-2009. Columns (3)-(4) of panel D
present the results of using an alternative way to define control firms. Specifically, we match each treatment
firm with a control firm that is in the same industry, has the closest firm size, and has at least one institutional
blockholder. Treated_Alt is an indicator variable that equals one for the treatment firms and zero for the
control firms defined in this alternative way. Standard errors are all heteroscedasticity robust, clustered by
financial institution merger levels. ∗, ∗∗, and ∗∗∗ represent significance levels of 10%, 5%, and 1%,
respectively.
43

TABLE 5
Cross-sectional evidence: Information advantages
Panel A: Industry-specialist analyst coverage

(1) (2) (3) (4) (5) (6)
Com_Dummy (a) -0.027*** -0.018***
(-2.61) (-3.02)
Com_Dummy × High_Cover(b) 0.028** 0.023***
(2.35) (3.49)
LnNumInve(a) -0.043*** -0.026***
(-3.97) (-4.28)
LnNumInve × High_Cover(b) 0.012 0.011*
(1.01) (1.72)
LnNumFirm(a) -0.018*** -0.012***
(-3.05) (-3.30)
LnNumFirm × High_Cover(b) 0.014** 0.010***
(2.16) (2.90)
High_Cover -0.009 0.001 -0.008 -0.007 -0.000 -0.005
(-0.71) (0.09) (-0.61) (-1.08) (-0.01) (-0.74)
(a)+(b) p=0.89 p=0.02 p=0.35 p=0.48 p=0.05 p=0.56

Controls Yes Yes Yes Yes Yes Yes
Blockhoder Yes Yes Yes Yes Yes Yes
N 55,060 55,060 55,060 55,060 55,060 55,060
R2 0.087 0.087 0.087 0.059 0.060 0.059
Panel B: Opaque information environment

(1) (2) (3) (4) (5) (6)
Com_Dummy (a) -0.012 -0.010*
(-1.35) (-1.71)
Com_Dummy × High_Opaque(b) -0.018** -0.008*
(-2.16) (-1.74)
LnNumInve(a) -0.034*** -0.020***
(-4.10) (-3.85)
LnNumInve × High_Opaque (b) -0.018** -0.009**
(-2.54) (-2.12)
LnNumFirm(a) -0.004 -0.003
(-1.15) (-1.28)
LnNumFirm × High_Opaque (b) -0.012*** -0.006***
(-3.18) (-2.72)
High_Opaque 0.020*** 0.021*** 0.023*** 0.011*** 0.011*** 0.013***
(3.28) (3.48) (4.39) (3.00) (3.05) (3.95)
(a)+(b) p=0.00 p=0.00 p=0.00 p=0.00 p=0.00 p=0.00

44

N 96,119 96,119 96,119 96,119 96,119 96,119
R2 0.132 0.133 0.132 0.087 0.087 0.087
Panel C: Cross-sectional analysis in DiD setting
Post -0.006 -0.021* 0.001 -0.017
(-0.47) (-1.78) (0.05) (-1.50)
Treated×Post -0.243*** -0.117*** 0.013 -0.004
(-6.08) (-4.52) (0.28) (-0.14)
High_Cover×Post 0.012 0.002
(0.72) (0.20)
Treated×Post×High_Cover 0.161** 0.090**
(2.24) (2.36)
High_Opaque×Post -0.007 -0.008
(-0.42) (-0.68)
Treated×Post×High_Opaque -0.245*** -0.088**
(-5.54) (-2.20)
N 7,087 7,087 7,087 7,087
R2 0.070 0.067 0.071 0.067
Notes: This table examines whether the relation between common ownership and crash risk varies with
common owners’ information advantages. In panel A, High_Cover is an indicator variable that equals one
if the number of industry-specialist analysts following a firm is above the year-industry median, and zero
otherwise. In panel B, High_Opaque is an indicator variable that equals one if a firm’s opaqueness measure
is above the industry median in a given year, and zero otherwise. The dependent variables are the crash risk
measures, Ncskew and Duvol. The key independent variables are common ownership proxies, Com_Dummy,
LnNumInve, and LnNumFirm. Control variables include Size, MTB, Leverage, ROA, Return, Sigma, Dturn,
Opaque, InstiOwn, CrossDiff, BlockD, and IOQix. Row (a)+(b) reports p values of the tests on whether the
sum of the coefficients in rows (a) and (b) is different from zero. Standard errors are all heteroscedasticity
robust standard errors clustered by both firm and year. In panel C, we conduct the cross-sectional analysis
in DiD setting arising from the financial institution mergers. The dependent variables are the crash risk
measures, Ncskew and Duvol. Treated is an indicator variable that equals one for treatment firms and zero
for control firms. Post is an indicator variable that equals one for the post-event period (the three years after
mergers), and zero otherwise. High_Cover (High_Opaque) is an indicator variable that equals one if the
number of industry-specialist analysts (opaque information environment) of a firm in the pre-merger period
is above the median, and zero otherwise. Control variables include Size, MTB, Leverage, ROA, Return,
Sigma, Dturn, Opaque, InstiOwn, CrossDiff, BlockD, and IOQix. Standard errors are all heteroscedasticity
robust, clustered by financial institution merger levels. Appendix A presents variable definitions.
Continuous variables are winsorized at the 1% and 99% levels. ∗, ∗∗, and ∗∗∗ represent significance levels
of 10%, 5%, and 1%, respectively.
45

TABLE 6
Cross-Sectional evidence: Incentives to internalize externalities
Panel A: Industry homogeneity as a proxy for managerial labor market condition

(1) (2) (3) (4) (5) (6)
Com_Dummy (a) -0.009 -0.007
(-0.97) (-1.22)
Com_Dummy × High_Homo (b) -0.024** -0.013*
(-2.22) (-2.02)
LnNumInve(a) -0.033*** -0.020***
(-3.72) (-3.47)
LnNumInve × High_Homo (b) -0.020** -0.010*
(-2.18) (-1.72)
LnNumFirm(a) -0.006 -0.004
(-1.52) (-1.45)
-
LnNumFirm × High_Homo (b) -0.013**
0.008***
(-2.55) (-2.58)
High_Homo 0.004 0.003 0.006 0.000 -0.001 0.002
(0.41) (0.28) (0.49) (0.08) (-0.22) (0.38)
(a)+(b) p=0.00 p=0.00 p=0.00 p=0.00 p=0.00 p=0.00

N 96,119 96,119 96,119 96,119 96,119 96,119
R2 0.132 0.132 0.132 0.087 0.087 0.087
Panel B: Importance of a firm in common owners’ portfolios

(1) (2) (3) (4) (5) (6)
Com_Dummy (a) -0.009 -0.007
(-0.98) (-1.23)
Com_Dummy × High_Atten (b) -0.021** -0.013**
(-2.52) (-2.69)
LnNumInve(a) -0.039*** -0.022***
(-4.28) (-4.15)
LnNumInve × High_Atten (b) -0.009 -0.006
(-1.05) (-1.24)
LnNumFirm(a) -0.008** -0.004
(-1.98) (-1.67)
LnNumFirm × High_Atten (b) -0.007* -0.006**
(-1.87) (-2.57)
High_Atten 0.000 -0.009 -0.005 0.000 -0.005 -0.001
(0.00) (-1.05) (-0.71) (0.05) (-1.00) (-0.20)
(a)+(b) p=0.00 p=0.00 p=0.00 p=0.00 p=0.00 p=0.00

46

N 96,119 96,119 96,119 96,119 96,119 96,119
R2 0.132 0.133 0.132 0.087 0.087 0.087
Panel C: Cross-sectional analysis in DiD setting
Post -0.019 -0.030*** -0.030 -0.031*
(-1.14) (-2.72) (-1.15) (-1.78)
Treated×Post -0.101*** -0.036* -0.013 -0.004
(-2.82) (-1.69) (-0.21) (-0.16)
High_Homo×Post 0.039 0.022
(1.42) (1.24)
Treated×Post×High_Homo -0.076* -0.055*
(-1.98) (-1.85)
High_Atten×Post 0.056 0.023
(1.55) (0.92)
Treated×Post×High_Atten -0.200** -0.088*
(-2.36) (-1.91)
N 7,087 7,087 7,087 7,087
R2 0.070 0.067 0.071 0.067
Notes: This table examines whether the relation between common ownership and crash risk varies with the
incentives to internalize externalities. In panel A, High_Homo is an indicator variable that equals one when
an industry’s homogeneity index is above the sample median in a year, and zero otherwise. In panel B, we
compute the average ratio of a firm’s value to common owners’ portfolio values to measure whether a stock
makes up a larger proportion of common owners’ overall portfolios. High_Atten is set to one if this average
ratio is above the year-industry median, and zero otherwise. The dependent variables are the crash risk
measures, Ncskew and Duvol. The key independent variables are common ownership proxies, Com_Dummy,
Opaque, InstiOwn, CrossDiff, BlockD, and IOQix. Row (a)+(b) reports p values of the tests on whether the
sum of the coefficients in rows (a) and (b) is different from zero. Standard errors are all heteroscedasticity
robust standard errors clustered by both firm and year. In panel C, we conduct the cross-sectional analysis
in DiD setting arising from the financial institution mergers. The dependent variables are the crash risk
measures, Ncskew and Duvol. Treated is an indicator variable that equals one for treatment firms and zero
for control firms. Post is an indicator variable that equals one for the post-event period (the three years after
mergers), and zero otherwise. High_Homo (High_Atten) is an indicator variable that equals one if an
industry’s homogeneity index (the average ratio of a firm’s value to common owners’ portfolio values) in
the pre-merger period is above the median, and zero otherwise. Control variables include Size, MTB,
Leverage, ROA, Return, Sigma, Dturn, Opaque, InstiOwn, CrossDiff, BlockD, and IOQix. Standard errors
are all heteroscedasticity robust, clustered by financial institution merger levels. Appendix A presents
variable definitions. Continuous variables are winsorized at the 1% and 99% levels. ∗, ∗∗, and ∗∗∗ represent
significance levels of 10%, 5%, and 1% levels, respectively.
47

TABLE 7
Two-stage mechanism analysis: Accounting conservatism
Panel A: The first-stage analysis

Dep Var= CScore
(1) (2) (3)
Com_Dummy 0.0056**
(2.01)
LnNumInve 0.011***
(4.18)
LnNumFirm 0.004**
(2.06)
Controls Yes Yes Yes

Firm Yes Yes Yes
Blockholder Yes Yes Yes
Year Yes Yes Yes
N 96,119 96,119 96,119
Panel B: The second-stage analysis
(1) (2) (3) (4) (5) (6)
� 𝑪𝑪𝑪𝑪𝑪𝑪_𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 -3.634**
𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 -2.419*
(-2.04) (-1.97)
� 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳
𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 -3.948*** -2.268***
(-4.45) (-4.02)
�
𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 -2.942** -1.748**
(-2.08) (-2.07)

N 96,119 96,119 96,119 96,119 96,119 96,119
Notes: This table reports two-stage regression analyses on whether common ownership promotes
accounting conservatism and in turn reduces crash risk. Panel A reports the first-stage regression estimates
for the effect of common ownership on accounting conservatism. The dependent variable is the accounting
conservatism measure, CScore, which is proposed by Khan and Watts (2009). The key independent
variables are common ownership proxies, Com_Dummy, LnNumInve, and LnNumFirm. Control variables
include Size, MTB, Leverage, ROA, Return, Sigma, Dturn, Opaque, InstiOwn, CrossDiff, BlockD, and
IOQix. Panel B reports the second-stage regression estimates for the effect of common ownership-related
accounting conservatism on crash risk. The dependent variables are the crash risk measures, Ncskew and
� , is the predicted CScore based on the first-stage regression,
Duvol. The key independent variables, 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
capturing the part of CScore that can be explained by common ownership. Control variables are the same
as those in the first-stage regression. For brevity, we do not report the coefficients of the control variables.
Standard errors are all heteroscedasticity robust, clustered by both firm and year. Appendix A presents
variable definitions. Continuous variables are winsorized at the 1% and 99% levels. ∗, ∗∗, and ∗∗∗ represent
48

TABLE 8
Two-stage mechanism analysis: Overinvestment
Panel A: The first-stage analysis
Dep Var= OverInv
(1) (2) (3)
Com_Dummy -0.002***
(-2.83)
LnNumInve -0.004***
(-5.59)
LnNumFirm -0.002***
(-3.50)
Controls Yes Yes Yes

Firm Yes Yes Yes
Blockholder Yes Yes Yes
Year Yes Yes Yes
N 68,204 68,204 68,204
Panel B: The second-stage analysis
(1) (2) (3) (4) (5) (6)
�
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑪𝑪𝑪𝑪𝑪𝑪_𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫𝑫 12.764** 8.181**
(2.01) (2.11)
�
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 13.377*** 7.687***
(4.14) (3.90)
�
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 9.341** 5.578**
(2.54) (2.50)

N 68,204 68,204 68,204 68,204 68,204 68,204
Notes: This table reports two-stage regression analyses on whether common ownership constrains
overinvestment and in turn reduces crash risk. Panel A reports the first-stage regression estimates for the
effect of common ownership on overinvestment. To measure overinvestment, we follow Biddle et al. (2009)
to estimate an investment model, and then group the observations into quartiles based on the residuals from
the investment model. Firm-year observations in the top quartile (in the middle two quartiles) are classified
as over-investing firms (the benchmark group). The dependent variable of the first-stage regression,
OverInv, equals the residuals of investment model if a firm is classified as over-investing, and zero for the
benchmark group. The key independent variables are common ownership proxies, Com_Dummy,
Opaque, InstiOwn, CrossDiff, BlockD, and IOQix. Panel B reports the second-stage regression estimates
for the effect of common ownership-related overinvestment on crash risk. The dependent variables are the
� , is the predicted OverInv
crash risk measures, Ncskew and Duvol. The key independent variables, 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂
based on the first-stage regression, capturing the part of OverInv that can be explained by common
ownership. Control variables are the same as those in the first-stage regression. For brevity, we do not report
the coefficients of the control variables. Standard errors are all heteroscedasticity robust, clustered by both
firm and year. Appendix A presents variable definitions. Continuous variables are winsorized at the 1% and
99% levels. ∗, ∗∗, and ∗∗∗ represent significance levels of 10%, 5%, and 1%, respectively.
49

TABLE 9
How do common owners discipline managers of high crash-risk firms?
Dep Var= Forced

(1) (2) (3) (4) (5) (6)
Com_Dummy (a) -0.001 0.000
(-0.27) (0.02)
Com_Dummy×High_Crash (b) 0.014*** 0.010**
(2.91) (1.99)
LnNumInve (a) -0.001 0.002
(-0.25) (0.67)
LnNumInve×High_Crash (b) 0.009* 0.002
(1.84) (0.56)
LnNumFirm (a) 0.001 0.001
(0.25) (0.50)
LnNumFirm×High_Crash (b) 0.006** 0.005*
(2.28) (1.85)
High_Crash=High_Ncskew -0.028** -0.024** -0.027**
(-2.54) (-2.22) (-2.42)
High_Crash=High_Duvol -0.006 -0.002 -0.006
(-0.73) (-0.30) (-0.65)
InstOwn×High_Crash 0.026** 0.024** 0.027** 0.004 0.007 0.004
(2.18) (2.16) (2.31) (0.43) (0.74) (0.46)
(a)+(b) p=0.02 p=0.09 p=0.03 p=0.10 p=0.32 p=0.06
N 19,767 19,767 19,767 19,767 19,767 19,767
R2 0.053 0.053 0.054 0.053 0.053 0.053
Notes: This table presents the regressions of forced CEO turnover on the interaction between common
ownership and stock price crash risk. The common ownership proxies are Com_Dummy, LnNumInve, and
LnNumFirm. High_Crash is set to one if a firm’s average crash risk, Ncskew in columns (1)-(3) or Duvol
in columns (4)-(6), over the past three years is above the median value, and zero otherwise. Our variable of
interest is the interaction term between a common ownership proxy and High_Crash. In this table, the
dependent variable is Forced, which equals to one if there is a forced CEO turnover in a given firm-year,
and zero otherwise. Following prior studies (e.g., Campbell et al., 2011), control variables include Size,
MTB, Leverage, ROA, Return, Growth, InstOwn, BlockD, CrossDiff, IOQix, SDReturn, CEO_Age,
CEO_Tenure, and CEO_Ownership. We also control for the interaction term between InstOwn and
High_Crash. Growth is the growth from the prior year to the current year. SDReturn is the standard
deviation of monthly returns of a firm during a given year. CEO_Age and CEO_Tenure are the age and
tenure of a firm’s CEO in a year. Other control variables are defined in Appendix A. Continuous variables
are winsorized at the 1% and 99% levels. For brevity, we do not report the coefficients of the control
variables. Row (a)+(b) reports p values of the tests on whether the sum of the coefficients in rows (a) and
(b) is different from zero. Standard errors are all heteroscedasticity robust and clustered at both firm and
year level. ∗, ∗∗, and ∗∗∗ represent significance levels of 10%, 5%, and 1%, respectively.
50

2023 Common Institutional Ownership and Stock Price Crash Risk

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2023 Common Institutional Ownership and Stock Price Crash Risk

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Common Institutional Ownership and Stock Price Crash Risk

Shenglan Chen 1 | Hui Ma 2 | Qiang Wu 3 | Hao Zhang 4*

Contemporary Accounting Research, forthcoming

Electronic copy available at: https://ssrn.com/abstract=3746777

Common institutional ownership occurs when an institutional investor holds significant

institutional ownership on an important capital market outcome—stock price crash risk.

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institutional owners possess informational advantages in monitoring managerial behaviors that

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points out that WorldCom’s “accounting fraud encouraged [competitors’] overinvestment.”

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common ownership and crash risk of these stocks.

additional control variables.

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statistically significant treatment effect.

Next, we conduct cross-sectional analyses on the mechanisms through which common

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externalities motivates common owners to become better monitors. 7

investors demand accounting conservatism as a governance device because it can constrain

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Second, we contribute to the crash risk literature by introducing common ownership as a

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firm’s bad news hoarding. 9

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portfolios with reduced crash risk.

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owners of multiple same-industry companies have economies of scale in information acquisition

from their analysis of one firm to peer firms.

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in inefficient projects and ultimately resulting in lower crash risk.

to governance,” which could be addressed by market-based solutions. Another stream of literature

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hypothesis in the null form:

HYPOTHESIS. Common institutional ownership is unrelated to stock price crash risk.

3. Data, variables, and research design

Data sources and sample selection

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Variables and the regression model

blockholders as institutional investors with at least 5% ownership in a firm. We focus on

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firm. We log-transform one plus NumInve and NumFirm to reduce skewness.

Using these variables, we estimate the following baseline regression model:

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and 99th percentiles. Appendix A presents the detailed variable definitions.

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approximately 65% of the observations have at least one institutional blockholder. 19

Baseline regression results

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LnNumInve (LnNumFirm) increases by one standard deviation, the corresponding decrease in

coefficients on the common ownership measures remain negative and significant.

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evidence that common institutional investors self-select into low-crash firms.

Second, we conduct DiD analyses on financial institution mergers. If two merging

increase in common ownership due to financial institution mergers.

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treatment firms from the control sample.

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The coefficients on Treated×Pre(−1) and Treated×Pre(−2) are statistically insignificant. This

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and (4) in panel C, respectively. As expected, we find insignificant coefficients on Treated×Post

Treated_Alt, to one if it is a treatment observation and zero if it is an observation from this

coefficients on Treated_Alt×Post are negative and significant.

Cross-sectional evidence: Information advantages of common ownership