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Market Segmentation and Cross-Predictability of Returns
Lior Menzly University of Chicago - Booth School of Business Oguzhan Ozbas University of Southern California - Marshall School of Business - Finance and Business Economics Department Journal of Finance, Forthcoming Abstract: 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. Accepted Paper Series Date posted: May 25, 2007 ; Last revised: November 02, 2009Suggested CitationContact Information
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