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
Citation
CHEN, Zilin; CHU, Liya; LIANG, Dawei; and Jun TU.
Far away from home: Investors' underreaction to geographically dispersed information. (2022). Journal of Economic Dynamics and Control. 136,.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7200
Additional URL
https://doi.org/10.1016/j.jedc.2022.104325