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RFS Advance Access published online on January 22, 2007
Review of Financial Studies, doi:10.1093/revfin/hhm003
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Industry Information Diffusion and the Lead-Lag Effect in Stock Returns*

Kewei Hou
Department of Finance Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, OH 43210

hou.28{at}osu.edu

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.


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