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Geographic Lead-Lag Effects Explained

Last Updated on 10 February, 2024 by Rejaul Karim

In the research paper “Geographic Lead-Lag Effects,” authors Christopher A. Parsons, Riccardo Sabbatucci, and Sheridan Titman delve into the intricate dynamics of stock returns between co-headquartered firms in different sectors.

They reveal intriguing geographic lead-lag effects that generate risk-adjusted returns of 5-6% per year, providing valuable insight into the structure of the investment analyst business. Unlike industry lead-lag effects, which are more prominent among smaller, thinly traded stocks with low analyst coverage, geographic lead-lag relationships operate independently of these factors.

As the investment analyst business is organized by sector rather than geographic region, the role of analysts common to both leading and lagging firms becomes crucial. This calls attention to the importance of understanding the interplay between return predictability, geographic momentum, industry momentum, analyst coverage, and limited attention within the context of lead-lag effects.

Abstract Of Paper

We document lead-lag effects in stock returns between co-headquartered firms operating in different sectors. Such geographic lead-lags yield risk-adjusted returns of 5-6% per year, about half that observed for industry lead-lag effects. However, while industry lead-lag effects are strongest among small, thinly traded stocks with low analyst coverage, geographic lead-lags are unrelated to these proxies for investor scrutiny. We propose an explanation linking this to the structure of the investment analyst business, which is organized by sector, rather than by geographic region. In particular, our findings suggest that in lead-lag relationships, analysts common to both the leading and lagging firm are important, irrespective of the number of analysts covering each individually.

Original paper – Download PDF

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Author

Christopher A. Parsons
Marshall School of Business, University of Southern California

Riccardo Sabbatucci
Stockholm School of Economics; Swedish House of Finance

Sheridan Titman
University of Texas at Austin – Department of Finance; National Bureau of Economic Research (NBER)

Conclusion

As the insightful research paper “Geographic Lead-Lag Effects” by Christopher A. Parsons, Riccardo Sabbatucci, and Sheridan Titman reaches its culmination, it becomes evident that understanding the stock returns between co-headquartered firms operating in different sectors is of paramount importance.

The discovery of geographic lead-lag effects’ influence on risk-adjusted returns of 5-6% per year sheds light on the inner workings of the investment analyst business. In contrast to industry lead-lag effects, geographic lead-lags operate independently from traditional factors, revealing new dimensions for consideration.

The crucial role of analysts shared by both leading and lagging firms emerges as a vital factor. This research underscores the need to further explore the interplay between return predictability, geographic momentum, industry momentum, analyst coverage, and limited attention to enhance comprehension of the intricacies that govern lead-lag effects in the financial world.

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FAQ

Q1: What is the main focus of the research paper “Geographic Lead-Lag Effects” by Christopher A. Parsons, Riccardo Sabbatucci, and Sheridan Titman?

The paper explores lead-lag effects in stock returns between co-headquartered firms operating in different sectors. It specifically investigates geographic lead-lag effects, revealing their impact on risk-adjusted returns and highlighting their independence from factors that typically influence industry lead-lag effects.

Q2: What distinguishes geographic lead-lag effects from industry lead-lag effects, and how do they relate to investor scrutiny and analyst coverage?

Unlike industry lead-lag effects, which are more prominent among smaller, thinly traded stocks with low analyst coverage, geographic lead-lags operate independently of these factors. The research suggests that the structure of the investment analyst business, organized by sector rather than geographic region, plays a crucial role in this distinction. Analysts common to both leading and lagging firms become important in geographic lead-lag relationships.

Q3: What are the implications of the findings on geographic lead-lag effects, and what aspects of the investment analyst business do they shed light on?

The research uncovers that geographic lead-lag effects generate risk-adjusted returns of 5-6% per year, providing valuable insights into the investment analyst business. The paper emphasizes the significance of understanding the interplay between return predictability, geographic momentum, industry momentum, analyst coverage, and limited attention within the context of lead-lag effects. This highlights the complexity and nuanced factors that influence stock returns in co-headquartered firms across different sectors.

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