News-Based Links and Cross-firm Return Predictability
41 Pages Posted: 14 Sep 2020 Last revised: 31 Dec 2020
Date Written: July 1, 2020
Applying a “co-coverage” concept to the Dow Jones Newswire articles, we propose to identify each firm’s news-based links (NBLs) and thereby construct a newsworthiness economic grouping scheme. The advantage of NBLs is to capture the up-to-date relative importance of different economic links between a base firm and its peers. We show that a base firm's share price responses persistently to the shock transmitted from its industry peers reweighted by the NBLs. Additional empirical tests show that the relative importance of those NBLs is not immediately clear to the investors and therefore is reflected sluggishly in the return shock from NBL peers to the base firms. Taken together, our results suggest that monitoring news co-coverage plays an important role in understanding the cross-firm return predictability documented in the literature.
Keywords: news co-coverage; lead-lag return momentum; investor attention; anomalies
JEL Classification: G12; G14
Suggested Citation: Suggested Citation