A Tale of Two News-implied Linkages: Information Structure, Processing Costs and Cross-firm Predictability

54 Pages Posted: 12 Feb 2024

See all articles by Shuyi Ge

Shuyi Ge

Nankai University - Department of Finance

Shaoran Li

Peking University

Hanyu Zheng

The University of Hong Kong - Faculty of Business and Economics

Date Written: January 29, 2024

Abstract

This paper decomposes news-implied linkages into two types: leader-follower links (LF) and peer links (PE), based on people's reading and information-processing habits. We explore how the structure of information impacts processing costs and subsequently leads to market outcomes by examining momentum spillover effects via these distinct linkage types. Our findings indicate that the information structure of leader-follower links is more readily comprehensible to investors than peer linkages. We provide empirical evidence of this by demonstrating faster attention spillover from leader to follower than among peer firms, using Baidu search data. Furthermore, we document that due to the lower information processing cost, information transmits through the leader-follower linkages more quickly, leading to a weaker momentum spillover effect compared to the more complex and less easily perceivable peer links.

Keywords: Information processing costs, Limited attention, Cross-firm momentum, News, Big textual data, Linked firms, Attention spillover, Return predictability

JEL Classification: G11, G12, G14

Suggested Citation

Ge, Shuyi and Li, Shaoran and Zheng, Hanyu, A Tale of Two News-implied Linkages: Information Structure, Processing Costs and Cross-firm Predictability (January 29, 2024). Available at SSRN: https://ssrn.com/abstract=4708912 or http://dx.doi.org/10.2139/ssrn.4708912

Shuyi Ge

Nankai University - Department of Finance ( email )

94 Weijin Road
Tianjin, 300071
China

Shaoran Li (Contact Author)

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, 100871
China

Hanyu Zheng

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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

Paper statistics

Downloads
50
Abstract Views
354
PlumX Metrics