We study the cross-sectional returns of the firms connected by news articles. A conservative algorithm is proposed to tackle the type-I error in identifying firm tickers and the well-defined directed news networks of S&P500 stocks are formed based on a modest assumption. After controlling for many other effects, we find strong evidence for the comovement effect between news-linked firms stock returns and reversal effect from lead stock return on 1-day ahead follower stock return, however, returns of lead stocks provide only marginal predictability on follower stock returns. Furthermore, both econometric and portfolio test reveals that network degree provides robust and significant cross-sectional predictability on monthly stock returns, and the type of linkages also matters for portfolio construction.
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