Q1

1. Studies find that the stock market performance of a firm predicts the performance of firms which are economically linked to that firm (e.g., its suppliers). That is, the stock returns of a firm tend to positively predict the stock return of its suppliers. Please explain the potential reasons behind this predictable pattern. If this is due to mispricing, how can you construct a trading strategy to exploit this mispricing behavior?

2. Describe two empirical facts about earnings announcements in US equity markets, and explain how these facts do or do not support theories of behavioral finance. I am just looking for any two facts relating to earnings announcements, and how these facts might be relevant to market imperfections or the efficient market hypothesis.