Information Markets, Analysts and Comovement in Stock Returns



We examine the idea of information spillover as the source of stock return comovement, where one (neglected) stock is priced using readily available information about other stocks that share similar fundamentals. We use the number of analysts following a stock to distinguish “high profile” stocks from neglected stocks and find that the prices of neglected stocks tend to comove with those of intensively covered stocks in the same industry. Consistent with recent theories about the information markets, we also find that the return comovement is more prominent in industries where analysts concentrate their coverage intensely on very few stocks. Finally, using earnings forecast data, we show that information spillovers from high-coverage, bellwether firms to low-coverage ones and the spillover effect is larger when the information is more certain (there is less dispersion in earnings forecast).
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Myra Lissenberg