Star Firms, Information Externalities, and Predictability

59 Pages Posted: 3 Jan 2023 Last revised: 19 Jun 2024

See all articles by Vidhi Chhaochharia

Vidhi Chhaochharia

University of Miami - Department of Finance

Alok Kumar

University of Miami - Miami Herbert Business School

Mehrshad Motahari

Bayes Business School (formerly Cass); University of Cambridge - Judge Business School

Ville Rantala

University of Miami - Department of Finance

Date Written: June 12, 2023

Abstract

We study information externalities generated by industry-specific "star firms." Changes in stars' relative earnings growth predict future earnings growth, consensus earnings surprises, and job postings of same-industry nonstar firms. We also find that stars' earnings performance changes predict GDP and employment growth at the industry level, and earnings predictability is stronger in less competitive industries. These information externalities are not fully reflected in stock prices, which generates predictability in returns. A Long-Short industry portfolio strategy based on earnings growth of star firms earns an annualized six-factor alpha of 8.64%. These findings provide valuation-based evidence of economic importance of star firms.

Keywords: Star firms, earnings predictability, return predictability, information spillover JEL Codes: G12, sell-side equity analysts, earnings predictability, return predictability, information spillover JEL Codes: G12

JEL Classification: G12, G14, G24.

Suggested Citation

Chhaochharia, Vidhi and Kumar, Alok and Motahari, Mehrshad and Rantala, Ville, Star Firms, Information Externalities, and Predictability (June 12, 2023). University of Miami Business School Research Paper No. 4314318, Available at SSRN: https://ssrn.com/abstract=4314318 or http://dx.doi.org/10.2139/ssrn.4314318

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

517B Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://sites.google.com/view/alokmiami/home

Mehrshad Motahari

Bayes Business School (formerly Cass) ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Ville Rantala

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

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