Offshore Sales Networks and Stock Return Predictability

Abstract

Based on 10-K textual analysis, we assemble firm-level offshore sales networks (OSN) and find strong return predictability among industry participants that have overlapping offshore sales activities. This intra-industry return predictability based on offshore sales networks is distinct from that along several previously documented economic linkages (e.g., industry momentum, technological links, and standalone vs conglomerate firms. Moreover, we find that the effect is stronger for firms that receive low investor attention, issue hard-to-read 10-Ks, and pose high arbitrage costs. Our results highlight important asset pricing implications of the commonality of corporate offshore activities, and are broadly consistent with sluggish price adjustment caused by investors’ inattention to offshore networks.

Keywords: offshoring, offshore operations, output network, stock returns, limited attention