News-Based Links and Cross-firm Return Predictability

48 Pages Posted: 14 Sep 2020 Last revised: 19 Oct 2021

See all articles by Ran Tao

Ran Tao

Accounting and Finance Department, University of Bristol

Andrew Yim

Bayes Business School, City, University of London

Tian Han

University of Reading - Henley Business School

Date Written: July 1, 2020

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

Suggested Citation

Tao, Ran and Yim, Andrew and Han, Tian, News-Based Links and Cross-firm Return Predictability (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3687222 or http://dx.doi.org/10.2139/ssrn.3687222

Ran Tao (Contact Author)

Accounting and Finance Department, University of Bristol

15-19 Tyndall's Park Rd
Bristol, BT95EE
United Kingdom

Andrew Yim

Bayes Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.bayes.city.ac.uk/faculties-and-research/experts/andrew-yim

Tian Han

University of Reading - Henley Business School ( email )

Greenlands
Reading, Henley on Thames RG6 6AH
United Kingdom

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