Psychological barrier and cross-firm return predictability *

We provide a psychological explanation for the delayed price response to news about eco-nomically linked firms. We show that the return predictability of economically linked firms depends on the nearness to the 52-week high stock price. The interaction between news about economically linked firms and the nearness to the 52-week high can partially ex -plain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. We also find that analysts react to news about economically linked firms but the 52-week high effect reduces such reactions, providing direct evidence that the 52-week high affects the belief-updating process . (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

This study provides a psychological explanation for the delayed price response to news about economically linked firms. It shows that the return predictability of economically linked firms depends on the nearness to the 52-week high stock price. The interaction between news about economically linked firms and the nearness to the 52-week high can partially explain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. Additionally, analysts react to news about economically linked firms but the 52-week high effect reduces such reactions, providing direct evidence that the 52-week high affects the belief-updating process.