When the Tail Wags the Dog: Industry Leaders, Limited Attention, and Spurious Cross-Industry Information Diffusion

Ling Cen (), Kalok Chan (), Sudipto Dasgupta () and Ning Gao ()
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Ling Cen: Rotman School of Management and Department of Management (UTSc), University of Toronto, Toronto, Ontario M5S 3E6, Canada
Kalok Chan: Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Sudipto Dasgupta: Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Ning Gao: Accounting and Finance Group, Manchester Business School, University of Manchester, Manchester M15 6PB, United Kingdom

Management Science, 2013, vol. 59, issue 11, 2566-2585

Abstract: Within an industry, stock returns of larger firms lead those of smaller firms, suggesting an intraindustry information diffusion process. Most industry leaders, however, have business segments in other industries (henceforth, minor-segment industries), whereas most small firms are pure players operating in one industry only. If investors cannot filter out the irrelevant information from the leaders' minor segments, the pure players will be mispriced due to spurious cross-industry information diffusion (SCIID). Consistent with the SCIID hypothesis, we document both a strong contemporaneous and a lead--lag relation in stock returns between firms from industry leaders' minor-segment industries and pure players in the industry leaders' major-segment industry. Our results are not due to potential missing common factors or economic relationships between pure players and firms in the minor-segment industries. This paper was accepted by Wei Xiong, finance.

Keywords: limited attention; category learning; industry information diffusion (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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