Technological links and predictable returns

Charles Lee, Stephen Teng Sun, Rongfei Wang and Ran Zhang

Journal of Financial Economics, 2019, vol. 132, issue 3, 76-96

Abstract: Employing a classic measure of technological closeness between firms, we show that the returns of technology-linked firms have strong predictive power for focal firm returns. A long-short strategy based on this effect yields monthly alpha of 117 basis points. This effect is distinct from industry momentum and is not easily attributable to risk-based explanations. It is more pronounced for focal firms that: (a) have a more intense and specific technology focus, (b) receive lower investor attention, and (c) are more difficult to arbitrage. Our results are broadly consistent with sluggish price adjustment to more nuanced technological news.

Keywords: Technology momentum; Return predictability; Technological closeness; Limited attention; Market efficiency (search for similar items in EconPapers)
JEL-codes: G10 G11 G14 O30 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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Working Paper: Technological Links and Predictable Returns (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:132:y:2019:i:3:p:76-96

DOI: 10.1016/j.jfineco.2018.11.008

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