Online from: 1988
|Title:||Economic links and predictable returns|
|Author(s):||Cohen L, Frazzini A|
|Journal:||Journal of Finance, Aug 2008, Volume: 63 Issue: 4 pp.1977-2011 (35 pages)|
|Keywords:||Assets Valuation, Capital Asset Pricing Model, Efficiency, Financial Information, Share Prices, Share Prices, Usa|
|Article type:||Research paper|
|Reference:||37AT477 (Permanent URL)|
Design/methodology/approach - Reviews prior studies of investor inattention. Tests for investor inattention by using publicly available information and important information on which they should act. Selects 11,484 unique supplier-customer relationships between 1980 and 2004, taking share prices six months after financial year-end. Controls for size, book-to-market, number of customers and percentage of sales per customer, and for being in the same industry. Adds characteristics of the links, and correlates the returns of each pair. Presents value- and equal-weighted excess returns with three to five factor alpha, for quintile portfolios of customers ranked on a monthly basis. Calculates underreaction coefficients, and runs cross-sectional Fama-MacBeth forecasting regressions of individual stock returns,
Findings - Finds that investors fail to react to news affecting customers, despite common knowledge of events and of the importance of a customer to its supplier. Shows that a momentum strategy of buying supplier shares, when the customer has a positive shock, generates significant and robust returns. Successfully predicts returns on a monthly basis.
Research limitations/implications - Proposes research into the types of information and delivery paths that do grab investors' attention, and into its generalizability.
Originality/value - Presents an ingenious and rich analysis of imperfect rational expectations that has implications for asset pricing models.