Follow the Leader: Using the Stock Market to Uncover Information Flows Between Firms

Abstract

We identify all return leader-follower pairs among individual stocks using Granger causality regressions. Thus-identified leaders 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