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Know Thy Neighbor: Industry Clusters, Information Spillovers, and Market Efficiency

Published online by Cambridge University Press:  12 September 2018

Joseph Engelberg ,
Arzu Ozoguz  and
Sean Wang
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Abstract

Firms in industry clusters have market prices that are more efficient than firms outside clusters. To establish causality, we analyze exogenous firm relocations and find that firms that relocate into industry clusters have higher levels of industry information in their prices. We argue that geographical proximity allows for information spillovers, reducing marginal cost to information producers. Our evidence supports this view: Analysts are more likely to cover stocks inside industry clusters, and when institutional investors have a large position in one stock in the industry cluster, they are more likely to hold other stocks in the same industry cluster.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 1937 - 1961
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We have benefited from discussions with an anonymous referee, Hendrik Bessembinder (the editor), Robert Bushman, Chris Malloy, Chris Parsons, and seminar participants at the University of Southern California, Rutgers University, the University of Washington, the University of Texas at Dallas, the 2010 Financial Intermediation Research Society Conference, the 2010 Annual Asset Pricing Retreat, and the 2011 American Finance Association Meeting.

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