Working Paper: NBER ID: w15833
Authors: Allaudeen Hameed; Randall Morck; Jianfeng Shen; Bernard Yeung
Abstract: We examine information spillover as a source of stock return synchronicity, where information about highly-followed "prominent" stocks is used to price other "neglected" stocks sharing a common fundamental component. We find that stocks followed by few analysts co-move significantly with firm-specific fluctuations in the prices of highly followed stocks in the same industry, but do not observe the converse. This effect is more prominent in industries where analysts follow fewer stocks. Earnings forecast revisions for highly followed stocks cause price changes in little followed stocks, but the converse is again not observed. This is consistent with information spillover being primarily unidirectional - flowing from prominent to neglect stocks, but not vice versa. These findings also validate models of specialized information intermediaries in stock markets assisting the information capitalization process.
Keywords: information spillover; stock return synchronicity; analyst coverage; earnings forecast revisions
JEL Codes: D82; G14; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price changes in less followed stocks (G14) | Earnings forecast revisions for highly followed stocks (G17) |
| Earnings forecast revisions for highly followed stocks (G17) | Price changes in less followed stocks (G14) |
| Analyst coverage of stocks (G24) | Price movements in neglected stocks (G14) |
| Information from highly followed stocks (G17) | Price changes in neglected stocks (G14) |
| Earnings forecast revisions for low coverage stocks (G17) | Prices of high coverage stocks (G13) |
| Stocks with more analysts following them (G24) | Comovement with other stocks in the same industry (L69) |