Inter-Industry Network Structure and the Cross- Predictability of Earnings and Stock Returns

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 non-central industries. Analogously, we find that the accounting performance of central industries associate more strongly with macroeconomic measures than does the accounting performance of non-central industries. Comparing central industries to non-central industries, 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.

Keywords: Information transfer, inter-industry networks, aggregate risk, earnings, stock returns

JEL Classification: D57, G14, M41