Firm centrality and limited attention

Date
2021-12-17
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Source Title
International Review of Economics & Finance
Print ISSN
1059-0560
Electronic ISSN
1873-8036
Publisher
Elsevier BV
Volume
78
Issue
Pages
483 - 500
Language
English
Type
Article
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Abstract

This study examines whether investor attention towards stocks is related to firm centrality in the input-output network. Using a data set of firms’ principal customers, we investigate the effect of firm centrality on the stock return predictability across economically linked firms. We find that stock prices do not promptly incorporate news about principal customers, generating return predictability which diminishes with the customer firm centrality levels. We show that this result is driven by limited investor attention. The evidence reveals that customer firms occupying more central positions in the network receive more investor attention. The results remain strong even when we make use of size-adjusted centrality values, indicating that the centrality effect is not driven by firm size. We find that more central firms are associated with greater financial analyst coverage and greater institutional investor equity holdings. Moreover, our analyses explicate that the source of information has an important role in attracting investor attention.

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Keywords
Investor attention, Network centrality, Stock return predictability
Citation
Published Version (Please cite this version)