This paper explores the accuracy of information diffusion along the supply-chain under
noisy stock prices. Using mutual fund fire sales as a proxy for customer nonfundamental
price shocks, I find that supplier stock prices incorporate the noisy fluctuation of customer
prices. A long-short portfolio based on customer returns generates monthly alphas
of 117 basis points. The reaction to customer nonfundamental shocks is probably driven
by investors’ limited ability and is more severe when a firm has low analyst coverage, high
intangible assets, and when investor sentiment is high.
Permanent URL for this record: https://lbezone.hkust.edu.hk/bib/991012873162703412