A Frog in Every Pan: Information Discreteness and the Lead-lag Returns Puzzle
79 Pages Posted: 4 Nov 2020 Last revised: 10 Jun 2021
Date Written: November 4, 2020
We re-examine the puzzling pattern of lead-lag returns among economically-linked firms. Our results show that investors consistently underreact to information from lead firms that arrives continuously, while information with the same cumulative returns arriving in discrete amounts is quickly absorbed into price. This finding holds across many different types of economic linkages, including shared-analyst-coverage (Ali and Hirshleifer, 2020). We conclude that the “frog in the pan” (FIP) momentum effect first documented by Da, Gurun, and Warachka (2014) is pervasive in co-momentum settings, suggesting that information discreteness (ID) serves as a cognitive trigger that reduces investor inattention and improves inter-firm news transmission.
Keywords: Momentum spillovers, return prediction, investor inattention, belief updating.
JEL Classification: G10, G14, G17, G40, G41, M20
Suggested Citation: Suggested Citation