Market Frictions, Price Delay, and the Cross-Section of Expected Returns

Kewei Hou; Tobias J. Moskowitz

doi:10.1093/rfs/hhi023

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Market Frictions, Price Delay, and the Cross-Section of Expected Returns

Kewei Hou^1,2; Tobias J. Moskowitz³

¹ The Ohio State University · ² Fisher College · ³ University of Chicago

Review of Financial Studies 2005

We parsimoniously characterize the severity of market frictions affecting a stock using the delay with which its price responds to information. The most delayed firms command a large return premium not explained by size, liquidity, or microstructure effects. Moreover, delay captures part of the size effect, idiosyncratic risk is priced only among the most delayed firms, and earnings drift is monotonically increasing in delay. Frictions associated with investor recognition appear most responsible for the delay effect. The very small segment of delayed firms, comprising only 0.02% of the market, generates substantial variation in average returns, highlighting the importance of frictions.

DOI: 10.1093/rfs/hhi023
Volume: 18 (3)
Pages: 981-1020
Language: en
Export: BibTeX
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