Cohen, Lauren and Lou, Dong 
ORCID: 0000-0002-5623-4338
(2012)
Complicated firms.
Journal of Financial Economics, 104 (2).
383 - 400.
ISSN 0304-405X
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.
| Item Type: | Article |
|---|---|
| Official URL: | https://www.sciencedirect.com/journal/journal-of-f... |
| Additional Information: | © 2012 Elsevier B.V. |
| Divisions: | Finance |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies |
| Date Deposited: | 13 Oct 2011 15:37 |
| Last Modified: | 20 Nov 2024 00:24 |
| URI: | http://eprints.lse.ac.uk/id/eprint/38780 |
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