Star Firms, Information Externalities, and Predictability

55 Pages Posted: 3 Jan 2023 Last revised: 11 Jan 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: December 29, 2022

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.

Suggested Citation

Chhaochharia, Vidhi and Kumar, Alok and Motahari, Mehrshad and Rantala, Ville, Star Firms, Information Externalities, and Predictability (December 29, 2022). 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://moya.bus.miami.edu/~akumar

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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