Star Firms, Information Externalities, and Predictability

Abstract

We study information externalities of industry “star firms” (Gutiérrez and Philippon, 2019). Our results indicate that earnings shocks to star firms contain useful information about the future unexpected earnings and earnings surprises of other firms in the same industry. This information is not immediately reflected in analyst forecasts and stock prices, which generates predictability in returns. We also find evidence of lead-lag relations in the returns of star and nonstar firms. Plus, pricing anomalies among star firms affect the anomalies among nonstar firms. Together, these findings provide valuation-based evidence of the economic importance of star firms and demonstrate that their influence in financial markets has remained significant.

Keywords: Star firms, sell-side equity analysts, earnings predictability, return comovement, return predictability, anomalies.

JEL Classification: G12, G14, G24.