Inter-industry network structure and the cross-predictability of earnings and stock returns
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We examine how the patterns of inter-industry trade flows impact the transfer of information and economic shocks. We provide evidence that the intensity of transfers depends on industries’ positions within the economy. In particular, some industries occupy central positions in the flow of trade, serving as hubs. Consistent with a diversification effect, we find that these industries’ returns depend relatively more on aggregate risks than do returns of noncentral industries. Analogously, we find that the accounting performance of central industries associates more strongly with macroeconomic measures than does the accounting performance of noncentral industries. Comparing central industries to noncentral ones, we find that the stock returns and accounting performance of central industries better predict the performance of industries linked to them. This suggests that shocks to central industries propagate more strongly than shocks to other industries. Our results highlight how industries’ positions within the economy affect the transfer of information and economic shocks.
KeywordsInformation transfer Inter-industry networks Aggregate risk Earnings Stock returns
JEL ClassificationD57 G14 M41
We thank David Aboody, Sam Bonsall, Paul Fischer (editor), Robert Freeman, Rebecca Hann (RAST discussant), Adrienna Huffman (AAA discussant), Jack Hughes, Gil Sadka, Brett Trueman, an anonymous referee, and seminar participants at Columbia University, University of Texas Austin, the 2013 Temple University Accounting Conference, the 2013 Review of Accounting Studies Conference, and the American Accounting Association 2013 Annual Meeting for helpful comments. We also thank Sam Bonsall for providing data that identify bellwether firms.
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