Hostname: page-component-76fb5796d-skm99 Total loading time: 0 Render date: 2024-04-25T16:57:01.624Z Has data issue: false hasContentIssue false
  • English
  • Français

Know Thy Neighbor: Industry Clusters, Information Spillovers, and Market Efficiency

Published online by Cambridge University Press:  12 September 2018

Joseph Engelberg ,
Arzu Ozoguz  and
Sean Wang
Get access Rights & Permissions [Opens in a new window]

Abstract

Firms in industry clusters have market prices that are more efficient than firms outside clusters. To establish causality, we analyze exogenous firm relocations and find that firms that relocate into industry clusters have higher levels of industry information in their prices. We argue that geographical proximity allows for information spillovers, reducing marginal cost to information producers. Our evidence supports this view: Analysts are more likely to cover stocks inside industry clusters, and when institutional investors have a large position in one stock in the industry cluster, they are more likely to hold other stocks in the same industry cluster.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 1937 - 1961
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We have benefited from discussions with an anonymous referee, Hendrik Bessembinder (the editor), Robert Bushman, Chris Malloy, Chris Parsons, and seminar participants at the University of Southern California, Rutgers University, the University of Washington, the University of Texas at Dallas, the 2010 Financial Intermediation Research Society Conference, the 2010 Annual Asset Pricing Retreat, and the 2011 American Finance Association Meeting.

References

Almazan, A.; Motta, A.; Titman, S.; and Uysal, V.. “Financial Structure, Acquisition Opportunities, and Firm Locations.” Journal of Finance, 65 (2010), 529–563.Google Scholar
Amihud, Y.“Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–36.Google Scholar
Audrestsch, D. B., and Feldman, M. P.. “Knowledge Spillovers and the Geography of Information.” In Handbook of Regional and Urban Economics, Vol. IV, Henderson, J. V. and Thiesse, J.-F., eds. North-Holland (2004), 2713–2739.Google Scholar
Bhojraj, S.; Lee, C. M. C.; and Oler, D.. “What’s My Line? A Comparison of Industry Classification Schemes for Capital Market Research.” Journal of Accounting Research, 41 (2003), 745–774.Google Scholar
Brennan, M.; Jegadeesh, N.; and Swaminathan, B.. “Investment Analysis and the Adjustment of Stock Prices to Common Information.” Review of Financial Studies, 6 (1993), 799–824.Google Scholar
Brown, L.; Hagerman, R.; Griffin, P.; and Zmijewski, M.. “Security Analysts Superiority Relative to Univariate Time-Series Models in Forecasting Quarterly Earnings.” Journal of Accounting and Economics, 9 (1987), 61–87.Google Scholar
Brunnermeier, M., and Nagel, S.. “Hedge Funds and the Technology Bubble.” Journal of Finance, 59 (2004), 2013–2040.Google Scholar
Bushee, B., and Goodman, T.. “Which Institutional Investors Trade Based on Private Information about Earnings and Returns?” Journal of Accounting Research, 45 (2007), 1–31.Google Scholar
Cheng, Y.; Liu, M.; and Qian, J.. “Buy-Side Analysts, Sell-Side Analysts, and Investment Decisions of Money Managers.” Journal of Financial and Quantitative Analysis, 41 (2006), 51–83.Google Scholar
Christ, J. P.“New Economic Geography Reloaded: Localized Knowledge Spillovers and the Geography of Innovation.” FZID Discussion Papers 01-2009, University of Hohenheim, Center for Research on Innovation and Services (2009).Google Scholar
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.Google Scholar
Coval, J., and Moskowitz, T.. “The Geography of Investment: Informed Trading and Asset Prices.” Journal of Political Economy, 109 (2001), 811–841.Google Scholar
Dougal, C.; Parsons, C.; and Titman, S.. “Urban Vibrancy and Corporate Growth.” Journal of Finance, 70 (2015), 163–210.Google Scholar
Ellison, G.; Glaeser, E.; and Kerr, W.. “What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns.” American Economic Review, 100 (2010), 1195–1213.Google Scholar
Engelberg, J.; Gao, P.; and Jagannathan, R.. “An Anatomy of Pairs Trading: The Role of Idiosyncratic News, Common Information and Liquidity.” Working Paper, Northwestern University (2008).Google Scholar
Engelberg, J.; Gao, P.; and Parsons, C.. “The Price of a CEO’s Rolodex.” Review of Financial Studies, 26 (2012), 79–114.Google Scholar
Grossman, S., and Stiglitz, J.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393–408.Google Scholar
Grullon, G.; Kanatas, G.; and Weston, J.. “Advertising, Breadth of Ownership, and Liquidity.” Review of Financial Studies, 17 (2004), 439–461.Google Scholar
Hameed, A.; Morck, R.; Shen, J.; and Yeung, B.. “Information, Analysts, and Stock Return Comovement.” Review of Financial Studies, 28 (2015), 3153–3187.Google Scholar
Hou, K.“Industry Information Diffusion and the Lead-Lag Effect in Stock Returns.” Review of Financial Studies, 20 (2007), 1113–1138.Google Scholar
Hou, K., and Moskowitz, T.. “Market Frictions, Price Delay and the Cross-Section of Expected Stock Returns.” Review of Financial Studies, 18 (2005), 981–1020.Google Scholar
Irvine, P.“Do Analysts Generate Trade for Their Firms? Evidence from the Toronto Stock Exchange.” Journal of Accounting and Economics, 30 (2000), 209–226.Google Scholar
Jacobs, J. The Economy of Cities. New York, NY: Random House (1969).Google Scholar
Jegadeesh, N.; Kim, J.; Krische, S.; and Lee, C.. “Analyzing the Analysts: When Do Recommendations Add Value?” Journal of Finance, 59 (2004), 1083–1124.Google Scholar
Ke, B., and Ramalingegowda, S.. “Do Institutional Investors Exploit the Post-Earnings Announcement Drift?” Journal of Accounting and Economics, 39 (2005), 25–53.Google Scholar
Kedia, S., and Rajgopal, S.. “Neighborhood Matters: The Impact of Location on Broad Based Stock Options Plans.” Journal of Financial Economics, 92 (2009), 109–127.Google Scholar
Khan, M., and Lu, H.. “Do Short Sellers Front-Run Insider Sales?” Accounting Review, 88 (2013), 1743–1768.Google Scholar
Lakonishok, J.; Shleifer, A.; Thaler, R.; and Vishny, R.. “Window Dressing by Pension Fund Managers.” American Economic Review, 81 (1991), 227–231.Google Scholar
Lee, C., and Swaminathan, B.. “Price Momentum and Trading Volume.” Journal of Finance, 55 (2000), 2017–2070.Google Scholar
Lo, A., and MacKinlay, C.. “When Are Contrarian Profits Due to Stock Market Overreaction?” Review of Financial Studies, 3 (1990), 175–205.Google Scholar
Loughran, T., and Schultz, P.. “Liquidity: Urban versus Rural Firms.” Journal of Financial Economics, 78 (2005), 341–374.Google Scholar
Mech, T.“Portfolio Return Autocorrelation.” Journal of Financial Economics, 34 (1993), 307–344.Google Scholar
Pirinsky, C., and Wang, Q.. “Does Corporate Headquarters Location Matter for Stock Returns?” Journal of Finance, 61 (2006), 1991–2015.Google Scholar
Van Nieuwerburgh, S., and Veldkamp, L.. “Information Acquisition and Under-Diversification.” Review of Economic Studies, 77 (2010), 779–805.Google Scholar
Veldkamp, L.“Information Markets and the Comovement of Asset Prices.” Review of Economic Studies, 73 (2006), 823–845.Google Scholar
Yan, X., and Zhang, Z.. “Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?” Review of Financial Studies, 22 (2007), 893–924.Google Scholar