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«Lauren Cohen Harvard Business School and NBER Dong Lou London School of Economics This draft: June 13, 2011 First draft: February 5, 2010 ...»

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This table reports Fama-MacBeth forecasting regressions of individual stock returns. The dependent variable is the monthly return of the conglomerate. The explanatory variables are the lagged pseudoconglomerate return (PCRET), and a number of interaction terms with this variable. Herfindahl is the Herfindahl Index based on the segment sales of the given firm in a fiscal year, Market Cap is the market capitalization of the conglomerate firm at the of June, Idio Vol is the idiosyncratic volatility in the prior year, Res Inst Own is institutional ownership of the conglomerate firm orthogonalized with regard to firm size at the end of June, Turnover is the turnover measured as the average daily turnover in the prior year, and # of Analysts is the number of analysts covering the firm at the end of June. All interaction terms are based on indicator variables that take the value of one if the underlying variable is above the sample median in each year and zero otherwise. All regressions also include the dummy itself, lagged RET, INDRET, SIZE, B/M, MOM, and TURNOVER as controls, which are described in Table IV, and are unreported for brevity. Cross sectional regressions are run every calendar month, and the time-series standard errors are adjusted for heteroskedasticity and autocorrelation (up to 12 lags). Fama-MacBeth tstatistics are reported below the coefficient estimates and 5% statistical significance is indicated in bold.

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This table reports Fama-MacBeth forecasting regressions of changes in analyst earnings forecasts. The dependent variable in columns 1 and 2 is the monthly change in the consensus analyst forecast for the subsequent annual earnings of the conglomerate firm (henceforth F), while the dependent variable in column 3 is that of the pseudo-conglomerate (PCF). A pseudo-conglomerate is simply a portfolio of the conglomerate firm’s industry segments constructed using solely the stand alone firms from any given industry. The explanatory variables are the lagged PCF, the firm’s own lagged F, and lagged average consensus forecast change of the conglomerate’s principal industry (INDF). All regressions also include SIZE, B/M, MOM, and TURNOVER, all of which are measured at the end of June of each year. Cross sectional regressions are run every calendar month and the time-series standard errors are adjusted for heteroskedasticity and autocorrelation (up to 12 lags). Fama-MacBeth t-statistics are reported below the coefficient estimates and 5% statistical significance is indicated in bold.

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This table reports Fama-MacBeth forecasting regressions of stock returns. The dependent variable in column 1 is the monthly return of the paired pseudo-conglomerate (PCRET), in column 2 is the monthly return of the conglomerate (RET), and in column 3 the excess return of the conglomerate over its paired pseudo-conglomerate (RET-PCRET). A pseudo-conglomerate is simply a portfolio of the conglomerate firm’s industry segments constructed using solely the stand alone firms from any given industry. In Panel A, the explanatory variables include the lagged pseudo-conglomerate small-trade imbalance in the previous year (PCIMBL) and the firm’s own small trade imbalance in the previous year (IMBL). In Panel B, the explanatory variables include the pseudo-conglomerate small-trade imbalance (PCIMBL) and the firm’s own small trade imbalance in the contemporaneous month (IMBL). Other control variables include the firm’s own lagged return (RET), and lagged return of the corresponding industry portfolio to the conglomerate’s principal industry (INDRET). All regressions also include SIZE, B/M, MOM, and TURNOVER, all of which are measured at the end of June of each year. Cross sectional regressions are run every calendar month and the time-series standard errors are adjusted for heteroskedasticity and autocorrelation (up to 12 lags). Fama-MacBeth t-statistics are reported below the coefficient estimates and 5% statistical significance is indicated in bold.

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This table shows calendar time portfolio abnormal returns. At the beginning of every calendar month, all conglomerate stocks are ranked in ascending order on the basis of the return of a portfolio of their pseudoconglomerate at the end of the previous month. A pseudo-conglomerate is simply a portfolio of the conglomerate firm’s industry segments constructed using solely the stand alone firms from any given industry. The ranked stocks are assigned to one of 10 decile portfolios. All stocks are value (equally) weighted within a given portfolio, and the portfolios are rebalanced every calendar month to maintain value (equal) weights. This table includes all available stocks with stock price greater than $5 at portfolio formation. L/S is the alpha of a zero-cost portfolio of conglomerate firms that holds the firms with the top 10% pseudo-conglomerate returns and sells short the firms with the bottom 10% pseudo-conglomerate returns in the previous month. In columns (1) and (2), a pseudo-conglomerate is constructed based on the conglomerate’s sales in each industry segment, while in columns (3) and (4) a pseudo-conglomerate is constructed based on the conglomerate’s assets in each industry segment. Larger (smaller) cap stocks are those with market capitalization above (below) the median of the NYSE sample. Higher (lower) idio vol stocks are those with idiosyncratic volatility above (below) the median of the current sample in the prior year. DGTW characteristic-adjusted returns are defined as raw monthly returns minus the returns on a value weighted portfolio of all CRSP firms in the same size, book-to-market, and one year momentum quintile. Returns are in monthly percent, t-statistics are shown below the coefficient estimates and 5% statistical significance is indicated in bold.

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This figure shows the size distributions of standalone firms and conglomerate firms. At the end of each year, all firms are classified into ten size deciles based on NYSE market capitalization breakpoints. P1 is the lowest NYSE market capitalization decile, while P10 is the highest.

0.3

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0.25 0.2 0.15 0.1 0.05 P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 Size Deciles (NYSE Breakpoints) Figure 2: Cumulative Returns to the Hedge Portfolio This figure shows the cumulative return to the hedge portfolio in the six months after portfolio formation. At the beginning of every calendar month, all conglomerate stocks are ranked in ascending order on the basis of the return of a portfolio of their pseudo-conglomerate at the end of the previous month. A pseudo-conglomerate is simply a portfolio of the conglomerate firm’s industry segments constructed using solely the stand alone firms from any given industry. The ranked stocks are assigned to one of 10 decile portfolios. All stocks are value (equally) weighted within a given portfolio, and the portfolios are rebalanced every calendar month to maintain value (equal) weights. L/S is the alpha of a zero-cost portfolio of conglomerate firms that holds the firms with the top 10% pseudo-conglomerate returns and sells short the firms with the bottom 10% pseudo-conglomerate returns in the previous month. The graph shows returns to both equalweighted (blue) and value-weighted (red) portfolios.

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1.50% 1.00% 0.50% 0.00%



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