Psychological Barrier and Cross-Firm Return Predictability
57 Pages Posted: 6 Feb 2018 Last revised: 22 May 2019
Date Written: May 21, 2019
This paper provides a psychological explanation for the delayed price response to news about economically linked firms. We show that the return predictability of economically linked firms depends on the nearness to the 52-week high. The interaction between news about economically linked firms and the nearness to 52-week high can at least partially explain the underreaction to news about customers, geographic neighbors, industry peers, standalone firms, or foreign industries. We further examine how anchoring on the 52-week high affects belief updating regarding analyst recommendation revisions. We find that analysts react to news about economically linked firms but that anchoring on the 52-week high reduces such reactions.
Keywords: Cross-firm return predictability, Psychological barrier, 52-week high, Customer momentum
JEL Classification: G10, G11, G14, G24, G41
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