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

Author

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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)

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.

Suggested Citation

  • Ling Cen & Kalok Chan & Sudipto Dasgupta & Ning Gao, 2013. "When the Tail Wags the Dog: Industry Leaders, Limited Attention, and Spurious Cross-Industry Information Diffusion," Management Science, INFORMS, vol. 59(11), pages 2566-2585, November.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:11:p:2566-2585
    DOI: 10.1287/mnsc.2013.1722
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    References listed on IDEAS

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    Cited by:

    1. Chi Dong & Hooi Hooi Lean & Zamri Ahmad & Wing-Keung Wong, 2019. "The Impact of Market Condition and Policy Change on the Sustainability of Intra-Industry Information Diffusion in China," Sustainability, MDPI, vol. 11(4), pages 1-20, February.
    2. Gao, George P. & Moulton, Pamela C. & Ng, David T., 2017. "Institutional ownership and return predictability across economically unrelated stocks," Journal of Financial Intermediation, Elsevier, vol. 31(C), pages 45-63.
    3. Choi, Hae Mi & Gupta-Mukherjee, Swasti, 2022. "Analysts’ reliance on industry-level versus firm-specific information: Implications for information production," Journal of Banking & Finance, Elsevier, vol. 143(C).
    4. Chi Dong & Hooi Hooi Lean & Zamri Ahmad, 2017. "Intra-industry information diffusion in China's stock market," Economics Bulletin, AccessEcon, vol. 37(1), pages 1-11.
    5. Kenneth Högholm & Johan Knif & Gregory Koutmos & Seppo Pynnönen, 2021. "Financial crises and the asymmetric relation between returns on banks, risk factors, and other industry portfolio returns," The Financial Review, Eastern Finance Association, vol. 56(1), pages 179-198, February.

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