Production Complementarity and Information Transmission Across Industries

66 Pages Posted: 19 Aug 2022 Last revised: 16 Feb 2024

See all articles by Charles M.C. Lee

Charles M.C. Lee

Foster School of Business, University of Washington; Stanford University - Graduate School of Business

Terrence Tianshuo Shi

Harvard University - Business School (HBS)

Stephen Teng Sun

City University of Hong Kong (CityU) - Department of Economics and Finance; City University of Hong Kong (CityU) - Department of Accountancy

Ran Zhang

Renmin University of China - School of Business

Date Written: Febuary 8, 2024

Abstract

Economic theory suggests that production complementarity is an important driver of sectoral co-movements and business cycle fluctuations. We operationalize this concept using a measure of production complementarity proximity (COMPL) between any two companies. We show firms from different industries but are closely aligned in COMPL exhibit strong co-movement in their operating, investing, and financing activities, as well as quarterly earnings revisions and monthly returns. We further document a lead-lag effect in their returns, such that a long-short strategy based on recent COMPL peer returns yields a monthly 6-factor alpha of 122 basis points. This inter-industry momentum spillover effect is not explained by other network-based mechanisms, such as shared analyst coverage. We conclude information transmission takes place along complementarity networks, but stock prices do not update instantaneously.

Keywords: Momentum spillovers, economically linked firms, return prediction, investor inattention, information transmission, cross-industry news, production complementarity

JEL Classification: E60, G10, G14, M20, M21

Suggested Citation

Lee, Charles M.C. and Shi, Terrence Tianshuo and Sun, Stephen Teng and Zhang, Ran, Production Complementarity and Information Transmission Across Industries (Febuary 8, 2024). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=4190096 or http://dx.doi.org/10.2139/ssrn.4190096

Charles M.C. Lee

Foster School of Business, University of Washington ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Stanford University - Graduate School of Business

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States

Terrence Tianshuo Shi

Harvard University - Business School (HBS) ( email )

Boston, MA 02163
United States

Stephen Teng Sun (Contact Author)

City University of Hong Kong (CityU) - Department of Economics and Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Ran Zhang

Renmin University of China - School of Business ( email )

Beijing
China

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