Information Diffusion in Analyst Portfolios
51 Pages Posted: 20 Nov 2016 Last revised: 30 Jul 2017
Date Written: July 29, 2017
Analysts cover portfolios of firms. Firms in these analyst portfolios are thus in principle subject to common (integrated) production of information. Nonetheless, this paper documents significant stock return and forecast revision predictability across firms with common analyst coverage. Prices exhibit delayed responses to news from smaller firms and firms from other industries. And, return predictability exists even among stocks with comparably low arbitrage risks. However, consistent with analysts being important messengers of information across fundamentally connected stocks, predictive patterns are weaker when analysts act on news from related companies. Additional evidence suggests attention as a possible driver of analysts’ responsiveness to common value-relevant information in connected stocks. Finally, the common analyst return effect is distinct from industry momentum, as well as other known cross-asset momentum anomalies.
Keywords: linked firms, analysts, return predictability, under-reaction, attention
JEL Classification: G10, G11, G14, G17, G24
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