A Frog in Every Pan: Information Discreteness and the Lead-lag Returns Puzzle

79 Pages Posted: 4 Nov 2020 Last revised: 10 Jun 2021

See all articles by Charles M.C. Lee

Charles M.C. Lee

Foster School of Business, University of Washington; Stanford University - Graduate School of Business

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Yang Song

University of Washington - Michael G. Foster School of Business

Hong Xiang

The Hong Kong Polytechnic University

Date Written: November 4, 2020

Abstract

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

Lee, Charles M.C. and Huang, Shiyang and Song, Yang and Xiang, Hong, A Frog in Every Pan: Information Discreteness and the Lead-lag Returns Puzzle (November 4, 2020). Available at SSRN: https://ssrn.com/abstract=3692879 or http://dx.doi.org/10.2139/ssrn.3692879

Charles M.C. Lee

Foster School of Business, University of Washington ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Stanford University - Graduate School of Business

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yang Song (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Hong Xiang

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

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