Economic Linkages Inferred from News Stories and the Predictability of Stock Returns
53 Pages Posted: 5 Dec 2013 Last revised: 30 Dec 2015
Date Written: December 28, 2015
We show that news stories contain information about economic linkages between firms and document that information diffuses slowly across linked stocks. Specifically, we identify linked stocks from co-mentions in news stories and find that linked stocks cross-predict one another's returns in the future. Our results indicate that information can flow from smaller to larger stocks and across industries. Content analysis of common news stories reveals many types of firm linkages that have not been previously studied. We find that the cross-predictability in returns remains even after firm pairs with customer-supplier ties are removed. Results show that both limited attention and slow processing of complex information contribute to slow information diffusion.
Keywords: News Media, Soft Information, Linked Stocks, Information Leadership, Lead-Lag Effect, Complex Information, Limited Attention, Market Efficiency
JEL Classification: G10, G12, G14, G17
Suggested Citation: Suggested Citation