Cross-Firm Information Flows and the Predictability of Stock Returns
77 Pages Posted: 11 May 2013 Last revised: 21 Mar 2016
Date Written: January 6, 2015
We identify all return leader-follower pairs among individual stocks using Granger causality regressions. Thus-identified leaders can reliably predict their followers' returns out of sample, and the return predictability works at the level of individual stocks rather than industries. Our results indicate that, independent of its size, any firm may emerge as a return leader by being at the center of an important news development that has ramifications for other firms. Indeed, stocks undergoing news-generating developments see an increase in the number of stocks whose returns they lead.
Keywords: Information Leadership, Lead-Lag Effect, Corporate News Announcements, Limited Attention, Market Efficiency
JEL Classification: G10, G12, G14, G17
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