Abstract
Prior research has shown that information diffuses gradually across stocks that are economically linked at the industry level. Relying on a sample of U.S. stocks from 1972 to 2014, I document a similar pattern when stock portfolios are formed based on firm characteristics that are used in the anomaly literature (e.g., size, value, asset growth). Specifically, firm characteristics are useful to identify economic links, and earnings surprises contain information about future returns of other firms that share similar characteristics (i.e., similar-style firms). Such style-based earnings surprises can be used to predict a large number of style returns in the time-series. For the cross-section of stocks, I create a composite style-based earnings surprise measure (SESM), which generates an equal-weighted (value-weighted) long-short strategy return of 167 (101) basis points per month. The results are not due to industry spillover effects, the traditional post earnings announcement drift, unconditional abnormal style returns, or time variation in risk. My findings suggest a further channel of gradual information diffusion in security markets.
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