Investor Information Consumption and Stock Price Comovement
University of Mississippi - Department of Finance
February 1, 2017
I introduce a method for gauging qualitative similarity in the information environments between firms based on linguistic commonality in their newswire text. I find that this new measure of qualitative similarity predicts future cross-firm return correlation even after accounting for the pair’s contemporaneous price comovement. I also provide support for an existing theory of information-driven comovement by demonstrating that the relation between contemporaneous qualitative similarity and future return correlation changes in response to market conditions and firm characteristics. I find that aggregate comovement increases when investors focus their information consumption on firms whose payoffs covary strongly with many other companies.
Number of Pages in PDF File: 56
Keywords: Comovement, Dynamic Panel Estimation, Textual Analysis, Correlation
JEL Classification: C33, C53, D83, G00, G11, G12, G14
Date posted: September 4, 2012 ; Last revised: February 2, 2017