Complicated Firms

Abstract:     
We exploit a novel setting in which the same piece of information affects two sets of firms: one set of firms requires straightforward processing to update prices, while the other set requires more complicated analyses to incorporate the same piece of information into prices. We document substantial return predictability from the set of easy-to-analyze firms to their more complicated peers. Specifically, a simple portfolio strategy that takes advantage of this straightforward vs. complicated information processing classification yields returns of 117 basis points per month. Consistent with processing complexity driving the return relation, we further document that the more complicated the firm, the more pronounced the return predictability. In addition, we find that sell-side analysts are subject to these same information processing constraints, as their forecast revisions of easy-to-analyze firms predict their future revisions of more complicated firms.

Number of Pages in PDF File: 43

Keywords: Complicated trades, stand alone, conglomerate, frictions

JEL Classification: G10, G11, G14

working papers series