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 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.