Offshore Sales Networks and Stock Return Predictability
43 Pages Posted: 25 Sep 2019
Date Written: September 17, 2019
Based on 10-K textual analysis, we assemble firm-level offshore sales networks (OSN) and find strong return predictability among industry participants that have overlapping offshore sales activities. This intra-industry return predictability based on offshore sales networks is distinct from that along several previously documented economic linkages (e.g., industry momentum, technological links, and standalone vs conglomerate firms). A long-short strategy that exploits the similarity of offshore sales networks yields a monthly alpha of 1.1 percentage points. Moreover, we find that the effect is stronger for firms that receive low investor attention, issue hard-to-read 10-Ks, and pose high arbitrage costs. Our results highlight important asset pricing implications of the commonality of corporate offshore activities, and are broadly consistent with sluggish price adjustment caused by investors’ inattention to offshore networks.
Keywords: offshoring, offshore operations, output network, stock returns, limited attention
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