Information diffusion of upstream and downstream industry-wide earnings surprises and its implications

Hsiu-Lang Chen ()
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Hsiu-Lang Chen: University of Illinois at Chicago

Review of Quantitative Finance and Accounting, 2018, vol. 51, issue 3, No 7, 784 pages

Abstract: Abstract This study presents new evidence that industry-wide earnings surprises diffuse gradually across the supply chain at both industry and individual-firm levels. This evidence provides fundamental support for studies in the literature of gradual information diffusion, commonly using lagged returns as a proxy for information. To allow for the possibility that firms react differently to the industry-wide earnings surprises, this study measures how a stock’s returns respond to the part of its main customer or supplier industry’s lagged returns that are associated with earnings surprises. A long/short equity strategy that combines the firm’s response coefficient and the prior month’s main customer/supplier industry return is shown to be profitable. The strategy tends to select medium-sized firms across industries. Firms in the winner portfolio are more likely to have a positive earning response coefficient and to be less capital intensive and financially constrained. Winners also experience positive responses to both positive and negative shocks while losers experience negative responses to both types of shocks.

Keywords: Industry-wide earnings surprises; Information diffusion; Supply chain (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-017-0687-0

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