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Inter-industry network structure and the cross-predictability of earnings and stock returns

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  • Daniel Aobdia

    (Northwestern University)

  • Judson Caskey

    (University of Texas at Austin)

  • N. Bugra Ozel

    (UCLA, Anderson School of Management)

Abstract

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.

Suggested Citation

  • Daniel Aobdia & Judson Caskey & N. Bugra Ozel, 2014. "Inter-industry network structure and the cross-predictability of earnings and stock returns," Review of Accounting Studies, Springer, vol. 19(3), pages 1191-1224, September.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:3:d:10.1007_s11142-014-9286-7
    DOI: 10.1007/s11142-014-9286-7
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    JEL classification:

    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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