What Diffuses in Stock Prices? The Role of News and Noise in Global Networks

I study how the diffusion of market news, firm-specific news, and noise among firms affects stock returns in a global network. I use a structural vector auto-regression to estimate market news, firm-specific news, and noise. To determine global network linkages, I exploit analyst co-coverage. Investors display a categorical learning behavior as they are able to differentiate between news and noise and rather process market- wide than firm-specific news. It takes up to 3 months for investors to adjust stock prices to the information contained in the firm-specific news component. Investors’ underreaction is driven by limited attention to the diffusing firm-specific news