Market Segmentation and Cross-Predictability of Returns
University of Chicago - Booth School of Business
University of Southern California - Marshall School of Business - Finance and Business Economics Department
October 29, 2009
Journal of Finance, Forthcoming
We present evidence supporting the hypothesis that due to investor specialization and market segmentation, value-relevant information diffuses gradually in financial markets. Using the stock market as our setting, we find that (i) stocks that are in economically related supplier and customer industries cross-predict each other's returns, (ii) the magnitude of return cross-predictability declines with the number of informed investors in the market as proxied by the level of analyst coverage and institutional ownership, and (iii) changes in the stock holdings of institutional investors mirror the model trading behavior of informed investors.
Number of Pages in PDF File: 65Accepted Paper Series
Date posted: May 25, 2007 ; Last revised: November 2, 2009
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