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

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  • Chen, Zilin
  • Chu, Liya
  • Liang, Dawei
  • Tu, Jun

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.

Suggested Citation

  • Chen, Zilin & Chu, Liya & Liang, Dawei & Tu, Jun, 2022. "Far away from home: Investors’ underreaction to geographically dispersed information," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:dyncon:v:136:y:2022:i:c:s0165188922000306
    DOI: 10.1016/j.jedc.2022.104325
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    Cited by:

    1. Yi, Biao & Guo, Shuxin, 2022. "Common analyst links and predictable returns: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Geographic peers; Limited attention; Material subsidiaries; Return predictability; Slow information diffusion;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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