Essays on Information diffusion and stock market efficiency & analyst style

• Main Author: JIN, Zuben
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: Business aspects; Earnings conference calls; Topic modelling; Information diffusion; Cross-asset momentum; Abstract thinking; equity analyst; information environment; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/etd_coll/383; https://ink.library.smu.edu.sg/context/etd_coll/article/1381/viewcontent/dissertation__3_.pdf
• Institution: Singapore Management University

The dissertation consists of three chapters on information diffusion and stock market efficiency and analyst style. The first chapter examines the asset pricing implications of investors’ inattention to non-obvious firm relatedness hidden in earnings calls. This chapter documents that the overlap in attention allocation over various business aspects serves as a time-sensitive proxy for firm relatedness. By employing the unsupervised topic modelling methodology, I characterize the attention allocation of earnings conference call participants (executives, investors and analysts) over topics discussed. I construct a novel cross-firm topic similarity measure that captures difficultto-observe and time-varying firm relatedness compared with existing peer-firm classification systems. I verify that topic peers are fundamentally comoved. However, it is beyond human capacity to process information from a large number of earnings calls in a timely manner. A long-short strategy based on returns of topic peers yields a monthly alpha of approximately 69 basis points. The return predictability mainly stems from topic peers with similar business models, customer management and influential macroeconomic situations. The lead-lag return pattern is more pronounced among focal firms with less firm visibility, higher information complexity and less common information processors. The second chapter investigates whether investors incorporate the value-relevant information from peers with similar geographic locations. Using detailed information on establishments owned by U.S. public firms, we construct a novel measure of geographic linkage between firms. We show that the returns of geography-linked firms have strong predictive power for focal firm returns and fundamentals. A long-short strategy based on this effect yields monthly value-weighted alpha of approximately 60 basis points. This effect is distinct from other cross-firm return predictability and is not easily attributable to risk-based explanations. It is more pronounced for focal firms that receive lower investor attention, are more costly to arbitrage, and during high sentiment periods. Sell-side analysts similarly underreact, as their forecast revisions of geography-linked firms predict their future revisions of focal firms. Further tests suggest that the lead-lag relation we document results from innovation spillover among geographic peers in addition to their common exposure to the local economy. The third chapter examines whether abstract thinking facilitates generating investment insights. Exploiting the questions raised by analysts during earnings conference calls, we construct a (timevarying) Abstract Thinking Index (ATI) to quantify an individual analyst’s propensity to think in an abstract way. Analysts with a higher level of ATI are more likely to ask questions using abstract words and focus on logical reasoning, broader categories of topics and a firm’s future prospects. Abstract thinking analysts issue more accurate and informative earnings forecasts and recommendations. Such effects are stronger when analysts cover firms with more uncertain fundamentals and a poorer information environment. Abstract thinking analysts survive and improve the information environment of firms they cover, and oppositely concrete thinking analysts are less likely to be promoted. Overall, this chapter suggests that abstract thinking is valueenhancing for analysts and facilitates information discovery in financial markets.