This paper examines the relation between information transmission and cross-autocorrelations.
We present a simple model, where informed trading is transmitted from large to
small stocks with a lag. In equilibrium, large stock illiquidity induced by informed trading
portends stronger cross-autocorrelations. Empirically, we find that the lead-lag relation
increases with lagged large stock illiquidity. Further, the lead from large stock order flows
to small stock returns is stronger when large stock spreads are higher. In addition, this leadlag
relation is stronger before macro announcements (when information-based trading is
more likely) and weaker afterward (when information asymmetries are lower).