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Complicated Firms

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  • Lauren Cohen

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  • Dong Lou

    ()

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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-analyse 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. 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-analyse firms predict their future revisions of more complicated firms.

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    Bibliographic Info

    Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp683.

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    Date of creation: Jun 2011
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    Handle: RePEc:fmg:fmgdps:dp683

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    Web page: http://www.lse.ac.uk/fmg/

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    Cited by:
    1. Nagel, Stefan, 2012. "Empirical Cross-Sectional Asset Pricing," CEPR Discussion Papers 9227, C.E.P.R. Discussion Papers.

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