Psychological Barrier and Cross-Firm Return Predictability

76 Pages Posted: 6 Feb 2018 Last revised: 28 Sep 2020

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Hong Xiang

The University of Hong Kong

Date Written: September 27, 2020

Abstract

We provide 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 stock price. The interaction between news about economically linked firms and the nearness to the 52-week high can partially explain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. We also find that analysts react to news about economically linked firms but the 52-week high effect reduces such reactions, providing direct evidence that the 52-week high affects the belief-updating process.

Keywords: Cross-firm return predictability, Psychological barrier, 52-week high, Customer momentum

JEL Classification: G10, G11, G14, G24, G41

Suggested Citation

Huang, Shiyang and Lin, Tse-Chun and Xiang, Hong, Psychological Barrier and Cross-Firm Return Predictability (September 27, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3115934 or http://dx.doi.org/10.2139/ssrn.3115934

Shiyang Huang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Hong Xiang

The University of Hong Kong ( email )

Hong Kong

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