Star Firms, Information Externalities, and Predictability

60 Pages Posted: 3 Jan 2023 Last revised: 1 Sep 2023

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: March 12, 2023

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 earnings surprises and job postings of other same-industry nonstar firms. This information is not fully reflected in analyst forecasts and stock prices, which generates lead-lag effects and predictability in returns. A Long-Short industry portfolio strategy based on earnings shocks to star firms earns an annualized six-factor alpha of 8.64%. Further, we find evidence of anomaly spillovers between star and nonstar firms. Together, these findings provide valuation-based evidence of economic importance of star firms.

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

JEL Classification: G12, G14, G24.

Suggested Citation

Chhaochharia, Vidhi and Kumar, Alok and Motahari, Mehrshad and Rantala, Ville, Star Firms, Information Externalities, and Predictability (March 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
275
Abstract Views
1,098
Rank
206,847
PlumX Metrics