56 Pages Posted: 4 Sep 2012 Last revised: 2 Feb 2017
Date Written: 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.
Keywords: Comovement, Dynamic Panel Estimation, Textual Analysis, Correlation
JEL Classification: C33, C53, D83, G00, G11, G12, G14
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