Geographic Diffusion of Accounting Information, Analyst Behavior, and Return Predictability

We use a new disclosure-based approach to show that value-relevant information about publicly-traded firms is geographically distributed within the United States and the market is slow in aggregating this information. Firm fundamentals such as earnings and cash flows can be predicted using the fundamentals of other firms in economically relevant U.S. states, but sell-side equity analysts and institutional investors only partially incorporate this information in their respective earnings forecasts and holdings. Consequently, a Long−Short trading strategy that exploits the slow diffusion of geographic information earns an annual risk-adjusted return of over 9%