It's a Small World: Social Ties, Comovements, and Predictable Returns

78 Pages Posted: 18 Oct 2022 Last revised: 18 Jul 2023

See all articles by Lin Peng

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Muhammed Yönaç

University of Bristol Business School

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: July 17, 2023

Abstract

We identify a new dimension of cross-firm linkages by exploring the social connectedness between firms' geographical locations. Industry peers located in regions with strong social ties tend to adopt similar strategies and exhibit strong co-movements in both fundamentals and returns. However, this information is not immediately reflected in stock prices and can be exploited using information contained in social peer returns (SPFRET). The predictability of SPFRET lasts for up to a year and forecasts future earnings surprises, analysts' forecast errors, and returns around earnings announcements. The effect is particularly strong for low-visibility firms and those located outside of industry clusters.

Keywords: social networks, comovements, return predictability, machine learning

JEL Classification: G14, D85

Suggested Citation

Peng, Lin and Titman, Sheridan and Yönaç, Muhammed and Zhou, Dexin, It's a Small World: Social Ties, Comovements, and Predictable Returns (July 17, 2023). Available at SSRN: https://ssrn.com/abstract=4240056 or http://dx.doi.org/10.2139/ssrn.4240056

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Muhammed Yönaç

University of Bristol Business School ( email )

United States

HOME PAGE: http://https://sites.google.com/view/myonac

Dexin Zhou (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Avenue
New York, NY 10010
United States

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