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Complicated firms

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  • Cohen, Lauren
  • Lou, Dong
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    Abstract

    We exploit a novel setting in which the same piece of information affects two sets of firms: one set of firms requires straightforward processing to update prices, while the other set requires more complicated analyses to incorporate the same piece of information into prices. We document substantial return predictability from the set of easy-to-analyze firms to their more complicated peers. Specifically, a simple portfolio strategy that takes advantage of this straightforward vs. complicated information processing classification yields returns of 118 basis points per month before transaction costs. Consistent with processing complexity driving the return relation, we further show that the more complicated the firm, the more pronounced the return predictability. In addition, we find that sell-side analysts are subject to these same information processing constraints, as their forecast revisions of easy-to-analyze firms predict their future revisions of more complicated firms.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 104 (2012)
    Issue (Month): 2 ()
    Pages: 383-400

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    Handle: RePEc:eee:jfinec:v:104:y:2012:i:2:p:383-400

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Complicated processing; Return predictability; Standalone; Conglomerate; Market frictions;

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    References

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    Cited by:
    1. Chunmei Lin & Massimo Massa & and Hong Zhang, 2014. "Mutual Funds and Information Diffusion: The Role of Country-Level Governance," Tinbergen Institute Discussion Papers 14-079/IV/DSF76, Tinbergen Institute.
    2. Florian Esterer & David Schröder, 2014. "Implied cost of capital investment strategies: evidence from international stock markets," Annals of Finance, Springer, vol. 10(2), pages 171-195, May.
    3. Lauren Cohen & Karl B. Diether & Christopher Malloy, 2012. "Legislating Stock Prices," NBER Working Papers 18291, National Bureau of Economic Research, Inc.
    4. Cohen, Lauren & Diether, Karl & Malloy, Christopher, 2013. "Legislating stock prices," Journal of Financial Economics, Elsevier, vol. 110(3), pages 574-595.
    5. Lauren Cohen & Umit G. Gurun & Christopher J. Malloy, 2012. "Resident Networks and Firm Trade," NBER Working Papers 18312, National Bureau of Economic Research, Inc.

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