Trade links and return predictability: The Australian evidence

Miao Yu, Xiaolu Hu and Angel Zhong

Pacific-Basin Finance Journal, 2023, vol. 78, issue C

Abstract: This paper investigates the extent to which information contained in trading partners' stock prices is reflected in Australian stock returns. We document that the fundamentals of Australian firms are correlated along supply chain. Further, the lagged returns of customers predict the one-month future returns of focal firms, implying that information embedded in trade links is not fully incorporated in stock prices. A long-short portfolio that buys (short-sells) stocks with high (low) lagged customer returns yields 0.8% monthly abnormal return on average. The predictive power of customer returns is weakened among large firms, firms with a greater number of informed market participants and a higher level of investor attention, and dissipates as the holding period lengthens. This provides strong support for the gradual-information-diffusion hypothesis.

Keywords: Trade links; Asset pricing; Information diffusion; Return predictability (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:78:y:2023:i:c:s0927538x23000410

DOI: 10.1016/j.pacfin.2023.101975

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