News-Based Links and Cross-firm Return Predictability

Abstract

By applying a “co-coverage” concept to the Dow Jones Newswire Archive articles, we propose to identify each firm’s news-based links (NBLs) with other firms and thereby capture the changes in the links over time. We find that investors are sluggish in impounding the information learnable from the NBLs, leading to positive cross-firm return predictability. More importantly, NBLs are a meaningful component of various types of cross-firm return predictability previously documented in the literature. Specifically, in several industry schemes, the base firm’s stock return responds more favourably to the past return of its industry peers reweighted by the relative importance of the NBLs than weighted by the usually more persistent links of those schemes. Taken together, our results shed new light on the investor inattention theory as an explanation of various types of cross-firm return predictability documented in the literature.

Keywords: news co-coverage; lead-lag return momentum; investor attention; anomalies

JEL Classification: G12; G14