Far away from home: Investors' underreaction to geographically dispersed information

Publication Type

Journal Article

Publication Date

3-2022

Abstract

Using a novel data set to identify geographic peer firms based on the locations of both firms' headquarters and material subsidiaries, we show that returns on geographical peers have strong predictive power for focal firm returns. A value-weighted long-short strategy that buys stocks with the highest geo-peer returns and shorts stocks with the lowest geo-peer returns generates a Fama and French(2015) five-factor alpha of 0.6% per month. This strategy is distinct from other cross-firm momentum strategies and cannot be explained by local economic conditions. The effect is more pronounced among firms that receive less investor attention and that are more costly to arbitrage, consistent with slow information diffusion in the geographic network into stock prices.

Keywords

Geographic peers, limited attention, material subsidiaries, return predictability, slow information diffusion

Discipline

Finance and Financial Management

Research Areas

Finance

Publication

Journal of Economic Dynamics and Control

Volume

136

ISSN

0165-1889

Identifier

10.1016/j.jedc.2022.104325

Publisher

Elsevier

Additional URL

https://doi.org/10.1016/j.jedc.2022.104325

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