Is It Really There? Predictability of Supplier Returns After Large Customer Price Changes

Abstract

Cohen and Frazzini (2008) examine economically linked firms and document widespread cross-asset return predictability at monthly horizons, specifically from customers to their suppliers. They argue that limited investor attention is responsible for their results. We extend this investigation to the extremes of the return distribution. We examine return predictability for economically linked firms at the daily level by analyzing supplier stock price reaction after large customer price changes. In contrast to Cohen and Frazzini (2008), we conclude that investor attention is only ‘partially limited’ when examining the large, attention-grabbing customer price changes investigated in this paper: return predictability mainly occurs in the first week after the event, does not apply to the largest supplier stocks, and has disappeared, at least for negative events, in the more recent past.

Keywords: Asset pricing, limited attention, return predictability, customer-supplier relationships

JEL Classification: G12, G14