Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-23T22:09:07.463Z Has data issue: false hasContentIssue false
  • English
  • Français

Alliances and Return Predictability

Published online by Cambridge University Press:  16 December 2016

Jie Cao ,
Tarun Chordia  and
Chen Lin
Get access Rights & Permissions [Opens in a new window]

Abstract

Building on the growing literature on interfirm links and limited attention, we find evidence of return predictability across alliance partners. A long–short portfolio sorted on lagged returns of strategic alliance partners provides a return of 89 basis points per month that is robust to a number of specifications. Investor inattention and limits to arbitrage may be the source of the underreaction of a firm’s returns to that of its partners.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 5 , October 2016 , pp. 1689 - 1717
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aboody, D.; Lehavy, R.; and Trueman, B.. “Limited Attention and the Earnings Announcement Returns of Past Stock Market Winners.” Review of Accounting Studies, 15 (2010), 317–344.Google Scholar
Albuquerque, R.; Ramadorai, T.; and Watugala, S.. “Trade Credit and Cross-Country Predictable Firm Returns.” Journal of Financial Economics, 115 (2015), 592–613.Google Scholar
Amihud, Y.“Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “The Cross-Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006), 259–299.Google Scholar
Asness, C. S.; Porter, R. B.; and Stevens, R.. “Predicting Stock Returns Using Industry-Relative Firm Characteristics.” Working Paper, AQR Capital Management (2000).Google Scholar
Asparouhova, E.; Bessembinder, H.; and Kalcheva, I.. “Noisy Prices and Inference Regarding Returns.” Journal of Finance, 68 (2013), 665–714.Google Scholar
Avramov, D., and Chordia, T.. “Asset Pricing Models and Financial Market Anomalies.” Review of Financial Studies, 19 (2006), 1001–1040.Google Scholar
Avramov, D.; Chordia, T.; Jostova, G.; and Philipov, A.. “Anomalies and Financial Distress.” Journal of Financial Economics, 108 (2013), 139–159.Google Scholar
Badrinath, S. G.; Kale, J. R.; and Noe, T. H.. “Of Shepherds, Sheep, and the Cross-Autocorrelations in Equity Returns.” Review of Financial Studies, 8 (1995), 401–430.Google Scholar
Barber, B. M., and Odean, T.. “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies, 21 (2008), 785–818.Google Scholar
Barberis, N., and Thaler, R.. “A Survey of Behavioral Finance.” Handbook of the Economics of Finance, 1 (2003), 1053–1128.Google Scholar
Beatty, A.; Liao, S.; and Yu, J. J.. “The Spillover Effect of Fraudulent Financial Reporting on Peer Firms’ Investments.” Journal of Accounting and Economics, 55 (2013), 183–205.CrossRefGoogle Scholar
Berg, S. V., and Friedman, P.. “Impacts of Domestic Joint Ventures on Industrial Rates of Return: A Pooled Cross-Section Analysis, 1964–1975.” Review of Economics and Statistics, 63 (1981), 293–298.Google Scholar
Bodnaruk, A.; Massa, M.; and Simonov, A.. “Alliances and Corporate Governance.” Journal of Financial Economics, 107 (2013), 671–693.Google Scholar
Boone, A. L., and Ivanov, V. I.. “Bankruptcy Spillover Effects on Strategic Alliance Partners.” Journal of Financial Economics, 103 (2012), 551–569.Google Scholar
Brennan, M. J.; Chordia, T.; and Subrahmanyam, A.. “Alternative Factor Specifications, Security Characteristics, and the Cross-Section of Expected Stock Returns.” Journal of Financial Economics, 49 (1998), 345–373.CrossRefGoogle Scholar
Brennan, M. J.; Jegadeesh, N.; and Swaminathan, B.. “Investment Analysis and the Adjustment of Stock Prices to Common Information.” Review of Financial Studies, 6 (1993), 799–824.Google Scholar
Carhart, M. M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chakrabarty, B., and Moulton, P. C.. “Earnings Announcements and Attention Constraints: The Role of Market Design.” Journal of Accounting and Economics, 53 (2012), 612–634.Google Scholar
Chan, S. H.; Kensinger, J. W.; Keown, A. J.; and Martin, J. D.. “Do Strategic Alliances Create Value?” Journal of Financial Economics, 46 (1997), 199–221.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Recent Trends in Trading Activity and Market Quality.” Journal of Financial Economics, 101 (2011), 243–263.Google Scholar
Chordia, T.; Subrahmanyam, A.; and Tong, Q.. “Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?” Journal of Accounting and Economics, 58 (2014), 41–58.Google Scholar
Chordia, T., and Swaminathan, B.. “Trading Volume and Cross-Autocorrelations in Stock Returns.” Journal of Finance, 55 (2000), 913–935.Google Scholar
Chui, A. C.; Titman, S.; and Wei, K.. “Intra-Industry Momentum: The Case of REITs.” Journal of Financial Markets, 6 (2003), 363–387.Google Scholar
Cohen, L., and Frazzini, A.. “Economic Links and Predictable Returns.” Journal of Finance, 63 (2008), 1977–2011.Google Scholar
Cohen, L., and Lou, D.. “Complicated Firms.” Journal of Financial Economics, 104 (2012), 383–400.Google Scholar
Cooper, M. J.; Gulen, H.; and Schill, M. J.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 1609–1651.Google Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.Google Scholar
Daniel, K., and Titman, S.. “Evidence on the Characteristics of Cross Sectional Variation in Stock Returns.” Journal of Finance, 52 (1997), 1–33.Google Scholar
DellaVigna, S., and Pollet, J. M.. “Investor Inattention and Friday Earnings Announcements.” Journal of Finance, 64 (2009), 709–749.Google Scholar
Fama, E. F.“Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.Google Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Gomes-Casseres, B.; Hagedoorn, J.; and Jaffe, A. B.. “Do Alliances Promote Knowledge Flows?” Journal of Financial Economics, 80 (2006), 5–33.Google Scholar
Hirshleifer, D.; Lim, S. S.; and Teoh, S. H.. “Driven to Distraction: Extraneous Events and Underreaction to Earnings News.” Journal of Finance, 64 (2009), 2289–2325.Google Scholar
Hirshleifer, D., and Teoh, S. H.. “Limited Attention, Information Disclosure, and Financial Reporting.” Journal of Accounting and Economics, 36 (2003), 337–386.Google Scholar
Hoberg, G., and Phillips, G.. “Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis.” Review of Financial Studies, 23 (2010), 3773–3811.Google Scholar
Hoberg, G., and Phillips, G.. “Text-Based Network Industries and Endogenous Product Differentiation.” Journal of Political Economy, 124 (2016), 1423–1456.Google Scholar
Hong, H.; Lim, T.; and Stein, J. C.. “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” Journal of Finance, 55 (2000), 265–295.Google Scholar
Hou, K.“Industry Information Diffusion and the Lead-Lag Effect in Stock Returns.” Review of Financial Studies, 20 (2007), 1113–1138.Google Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Digesting Anomalies: An Investment Approach.” Review of Financial Studies, 28 (2015), 650–705.Google Scholar
Huang, X.“Thinking Outside the Borders: Investors’ Underreaction to Foreign Operations Information.” Review of Financial Studies, 28 (2015), 3109–3152.Google Scholar
Jegadeesh, N.“Evidence of Predictable Behavior of Security Returns.” Journal of Finance, 45 (1990), 881–898.Google Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.Google Scholar
Lo, A. W., and MacKinlay, A. C.. “When Are Contrarian Profits Due to Stock Market Overreaction?” Review of Financial Studies, 3 (1990), 175–205.Google Scholar
McConnell, J., and Nantell, T. J.. “Corporate Combinations and Common Stock Returns: The Case of Joint Ventures” Journal of Finance, 40 (1985), 519–536.Google Scholar
Menzly, L., and Ozbas, O.. “Market Segmentation and Cross-Predictability of Returns.” Journal of Finance, 65 (2010), 1555–1580.Google Scholar
Merton, R. C.“A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.Google Scholar
Moskowitz, T. J., and Grinblatt, M.. “Do Industries Explain Momentum?” Journal of Finance, 54 (1999), 1249–1290.Google Scholar
Muslu, V.; Rebello, M.; and Xu, Y.. “Sell-Side Analyst Research and Stock Comovement.” Journal of Accounting Research, 52 (2014), 911–954.Google Scholar
Nagel, S.“Short Sales, Institutional Investors and the Cross-Section of Stock Returns.” Journal of Financial Economics, 78 (2005), 277–309.Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Pastor, L., and Stambaugh, R. F.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.Google Scholar
Peng, L., and Xiong, W.. “Investor Attention, Overconfidence and Category Learning.” Journal of Financial Economics, 80 (2006), 563–602.Google Scholar
Pontiff, J.“Costly Arbitrage and the Myth of Idiosyncratic Risk.” Journal of Accounting and Economics, 42 (2006), 35–52.Google Scholar
Robinson, D. T.“Strategic Alliances and the Boundaries of the Firm.” Review of Financial Studies, 21 (2008), 649–681.Google Scholar
Shleifer, A., and Vishny, R. W.. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 35–55.Google Scholar
Zhang, X. F.“Information Uncertainty and Stock Returns.” Journal of Finance, 61 (2006), 105–136.Google Scholar