Social Ties, Comovements, and Predictable Returns

Abstract

We identify a new dimension of cross-firm linkages by exploring the social connectedness between firms' geographical locations. Industry peers located in regions with strong social ties tend to adopt similar strategies and exhibit strong co-movements in both fundamentals and returns. However, this information is not immediately reflected in stock prices and can be exploited using information contained in social peer returns (SPFRET). The predictability of SPFRET lasts for up to a year and forecasts future earnings surprises, analysts' forecast errors, and returns around earnings announcements. The effect is particularly strong for low-visibility firms and those located outside of industry clusters.

Keywords

Tags of Social Finance