News-Based Peers and Stock Returns

Applying a “co-coverage” concept to the Dow Jones Newswire articles, we propose to identify each firm's news-based peers (NBPs) and thereby construct a time-varying firm-centric grouping aimed to augment existing industry classification schemes. The advantage of NBP-augmented schemes over traditional industry classifications is to better capture the up-to-date relative importance of the economic links between a base firm and its peers. We show that the base firm's share price responds more favorably to shocks to the stock returns of its NBPs than of its traditional industry peers that are not NBPs. The response persists for several months, suggesting that the up-to-date relative importance of the economic links is not immediately clear to investors. Additional empirical tests show that the persistent response, referred to as NBP momentum, can partially unify several lead-lag return momentum previously documented and is consistent with the investor attention hypothesis. Taken together, our results suggest that monitoring news co-coverage is a key to understand the lead-lag return momentum documented in the literature