Know Thy Neighbor: Industry Clusters, Information Spillovers and Market Efficiency
We find that firms in industry clusters – those in both the same industry and geographic area – have market prices that are more efficient than firms outside clusters. We argue this is the case because geography allows for information spillovers, reducing the marginal cost to information producers like analysts and fund managers. To support this view, we find firms inside (outside) clusters have fundamentals such as investment and earnings that have stronger (weaker) co-movement. We also find analysts are more likely to cover stocks inside industry clusters and that, when mutual fund managers have a large position in one stock in the industry cluster, they are more likely to hold other stocks in the same industry cluster. Finally, we examine a special set of exogenous firm relocations to make causal statements about the effect of geography on information production and market efficiency.
Information, industry cluster, market efficiency
SMU Cox: Finance (Topic)