When the Tail Wags the Dog: Industry Leaders, Limited Attention and Spurious Cross-Industry Information Diffusion

The Management Science, Forthcoming

54 Pages Posted: 23 Feb 2007 Last revised: 17 May 2013

See all articles by Ling Cen

Ling Cen

The Chinese University of Hong Kong

Kalok Chan

CUHK Business School

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Ning Gao

Manchester Accounting and Finance Group, Alliance Manchester Business School, University of Manchester

Date Written: May 16, 2013

Abstract

Hou (2007) finds that within an industry, stock returns of larger firms lead those of smaller firms, suggesting an intra-industry information diffusion process. Most industry leaders, however, have business segments in other industries (henceforth, minor-segment industries), whereas most small firms are pure players operating in one industry only. If investors cannot filter out the irrelevant information from the leaders’ minor segments, the pure players will be mispriced due to spurious cross-industry information diffusion (SCIID). Consistent with the SCIID hypothesis, we document both a strong contemporaneous and a lead-lag relation in stock returns between firms from industry leaders’ minor-segment industries and pure players in the industry leaders’ major-segment industry. Our results are not due to potential missing common factors or economic relationships between pure players and firms in the minor-segment industries.

Keywords: Category Learning, Industry Information Diffusion

JEL Classification: G12, G14

Suggested Citation

Cen, Ling and Chan, Kalok and Dasgupta, Sudipto and Gao, Ning, When the Tail Wags the Dog: Industry Leaders, Limited Attention and Spurious Cross-Industry Information Diffusion (May 16, 2013). The Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=964106 or http://dx.doi.org/10.2139/ssrn.964106

Ling Cen

The Chinese University of Hong Kong ( email )

CYT Building
Sha Tin
Hong Kong, Hong Kong
Hong Kong

HOME PAGE: http:///sites.google.com/site/cenling/

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Ning Gao

Manchester Accounting and Finance Group, Alliance Manchester Business School, University of Manchester ( email )

Booth Street East
.
Manchester, M13 9SS
United Kingdom

HOME PAGE: http://www.research.manchester.ac.uk/portal/Ning.Gao.html

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