Competition Links and Stock Returns

This paper demonstrates that value-relevant information about a firm appearing in regulatory disclosures of other firms is overlooked by investors. Firms highly mentioned in the 10-K competition section of other firms tend to outperform with risk-adjusted returns of up to 9% annually. Outperformance is concentrated in firms whose competition references are made in the context of targeting rather than admiration. Consistent with investor inattention, abnormal returns stem from cross-sector competition mentions as well as firms with low-analyst coverage. Moreover, highly mentioned firms exhibit improved fundamentals in subsequent years, further signifying they are underpriced.

Automated summary

This study reveals that value-relevant information about a firm mentioned in regulatory disclosures of other firms is often overlooked by investors. Firms highly referenced in other companies' 10-K competition sections tend to outperform the market, especially if the references are in the context of targeting rather than admiration. These firms also show improved fundamentals in the following years, indicating that they are undervalued.