1 Cohen is at the Harvard Business School and NBER; Frazzini is at the University of Chicago Graduate School of Business and NBER. We would like to thank Nick Barberis, Effi Benmelech, Judy Chevalier, Kent Daniel, Doug Diamond, Gene Fama, Will Goetzmann, Ravi Jagannathan, Anil Kashyap, Josef Lakonisho · 2 Frazzini is at the University of Chicago Graduate School of Business and NBER. We would like to thank Nick Barberis, Effi Benmelech, Judy Chevalier, Kent Daniel, Doug Diamond, Gene Fama, Will Goetzmann, Ravi Jagannathan, Anil Kashyap, Josef Lakonishok, Owen Lamont, Jonathan Lewellen, Toby Moskowitz, · 3 Cohen is at the Harvard Business School and NBER
open access
Abstract
This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. Using a data set of firms' principal customers to identify a set of economically related firms, we show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long–short equity strategy based on this effect yields monthly alphas of over 150 basis points.