RFS Advance Access originally published online on January 22, 2007
Review of Financial Studies 2007 20(4):1113-1138; doi:10.1093/revfin/hhm003
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Industry Information Diffusion and the Lead-lag Effect in Stock Returns
Department of Finance, Fisher College of Business, The Ohio State University
Address correspondence to Kewei Hou, Department of Finance, Fisher College of Business, Ohio State University, 2100 Neil Avenue, Columbus, OH 43210, or e-mail: hou.28{at}osu.edu
JEL: G12, G14
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Abstract |
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I argue that the slow diffusion of industry information is a leading cause of the lead-lag effect in stock returns. I find that the lead-lag effect between big firms and small firms is predominantly an intra-industry phenomenon. Moreover, this effect is driven by sluggish adjustment to negative information, and is robust to alternative determinants of the lead-lag effect. Small, less competitive and neglected industries experience a more pronounced lead-lag effect. The lead-lag effect is related to the post-announcement drift of small firms following the earnings releases of big firms within the industry.
The article is based on my dissertation at the Graduate School of Business, University of Chicago. I am grateful to the members of my dissertation committee, Nicholas Barberis, George Constantinides, Eugene Fama, Richard Leftwich, and especially Tobias Moskowitz (the chair), for their guidance and encouragement. I also thank Nicole Boyson, Douglas Diamond, Milton Harris, Campbell Harvey (the editor), Owen Lamont, Tim Loughran, Lubos Pastor, David Robinson, Rene Stulz, Alvaro Taboada, an anonymous referee, and seminar participants at the University of Chicago, the University of Texas at Austin, Emory University, MIT, Yale University, the University of North Carolina, Vanderbilt University, the University of Southern California, Cornell University, and the Ohio State University for many helpful comments and suggestions as well as Sandra Sizer for editorial assistance. Research support from the Dice Center for Research in Financial Economics, the Dean's Summer Research Fellowship at the Ohio State University, and the Sanford J. Grossman Fellowship in honor of Arnold Zellner is gratefully acknowledged. Any remaining errors are my responsibility.